Ford Motor Credit Company
QUARTERLY REPORT
ON FORM 10-Q
for the quarter ended
June 30, 2004
Filed pursuant to Section 13
of the Securities Exchange Act of 1934
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 1-6368
Ford Motor Credit Company
(Exact name of registrant as specified in its charter)
Delaware 38-1612444
(State of incorporation) (I.R.S. employer identification no.)
One American Road, Dearborn, Michigan 48126
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (313) 322-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes _____ No X
As of July 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 37
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
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 June 30, 2004 and 2003
(in millions)
Second Quarter First Half
------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Financing revenue
Operating leases $ 1,463 $ 1,876 $ 3,023 $ 3,938
Retail 1,117 1,126 2,241 2,205
Interest supplements and other support costs earned
from affiliated companies 866 855 1,672 1,739
Wholesale 223 227 462 423
Other 60 72 109 161
------------ ------------ ------------ ------------
Total financing revenue 3,729 4,156 7,507 8,466
Depreciation on operating leases (1,242) (1,822) (2,549) (3,950)
Interest expense (1,295) (1,479) (2,624) (2,998)
------------ ------------ ------------ ------------
Net financing margin 1,192 855 2,334 1,518
Other revenue
Investment and other income related to sales of receivables 581 672 1,130 1,563
Insurance premiums earned, net 61 61 121 125
Other income 290 249 515 506
------------ ------------ ------------ ------------
Total financing margin and revenue 2,124 1,837 4,100 3,712
Expenses
Operating expenses 552 539 1,103 1,123
Provision for credit losses 76 542 377 1,063
Insurance expenses 74 95 111 138
------------ ------------ ------------ ------------
Total expenses 702 1,176 1,591 2,324
------------ ------------ ------------ ------------
Income from continuing operations before income taxes 1,422 661 2,509 1,388
Provision for income taxes 520 258 918 542
------------ ------------ ------------ ------------
Income from continuing operations before minority interests 902 403 1,591 846
Minority interests in net income of subsidiaries 1 2 1 3
------------ ------------ ------------ ------------
Income from continuing operations 901 401 1,590 843
Loss from discontinued/held-for-sale operations (4) - (5) -
------------ ------------ ------------ ------------
Net income $ 897 $ 401 $ 1,585 $ 843
============ ============ ============ ============
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)
June 30, December 31,
2004 2003
--------------- --------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 8,832 $ 15,688
Investments in securities 641 611
Finance receivables, net 107,607 108,912
Net investment in operating leases 21,638 23,164
Retained interest in securitized assets 16,396 13,017
Notes and accounts receivable from affiliated companies 1,438 1,653
Derivative financial instruments 5,782 9,866
Assets of discontinued/held-for-sale operations 385 388
Other assets 4,401 5,530
--------------- --------------
Total assets $ 167,120 $ 178,829
=============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Accounts payable
Trade, customer deposits, and dealer reserves $ 1,531 $ 1,535
Affiliated companies 1,456 1,258
--------------- --------------
Total accounts payable 2,987 2,793
Debt 138,270 149,652
Deferred income taxes, net 7,073 6,334
Derivative financial instruments 636 987
Liabilities of discontinued/held-for-sale operations 92 37
Other liabilities and deferred income 5,905 6,533
--------------- --------------
Total liabilities 154,963 166,336
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 407 420
Retained earnings 6,597 6,912
--------------- --------------
Total stockholder's equity 12,146 12,474
--------------- --------------
Total liabilities and stockholder's equity $ 167,120 $ 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 June 30, 2004 and 2003
(in millions)
First Half
-------------------------
2004 2003
------------ ------------
(Unaudited)
Cash flows from operating activities
Net income $ 1,585 $ 843
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for credit losses 377 1,063
Depreciation and amortization 2,789 4,149
Gain on sales of finance receivables (130) (284)
Increase in deferred income taxes 687 329
Decrease in other assets 3,415 1,202
(Decrease)/increase in other liabilities (654) 260
All other operating activities (88) 40
------------ ------------
Net cash provided by operating activities 7,981 7,602
------------ ------------
Cash flows from investing activities
Purchase of finance receivables (other than wholesale) (23,553) (20,732)
Collection of finance receivables (other than wholesale) 18,594 11,990
Purchase of operating lease vehicles (5,878) (5,332)
Liquidation of operating lease vehicles 4,448 6,405
Decrease/(increase) in wholesale receivables 265 (3,210)
Net change in retained interest (3,764) 408
(Increase)/decrease in note receivable with affiliate (53) 360
Proceeds from sale of receivables 5,326 13,573
Purchase of investment securities (425) (314)
Proceeds from sale/maturity of investment securities 386 372
Proceeds from debt repayments related to discontinued operations - 1,421
All other investing activities (28) 100
------------ ------------
Net cash (used in)/provided by investing activities (4,682) 5,041
------------ ------------
Cash flows from financing activities
Proceeds from issuance of long-term debt 5,595 7,266
Principal payments on long-term debt (16,320) (18,167)
Change in short-term debt, net 2,553 2,829
Cash dividends paid (1,900) (1,900)
------------ ------------
Net cash used in financing activities (10,072) (9,972)
Effect of exchange rate changes on cash and cash equivalents (83) 205
------------ ------------
Net change in cash and cash equivalents (6,856) 2,876
Cash and cash equivalents, beginning of period 15,688 6,793
------------ ------------
Cash and cash equivalents, end of period $ 8,832 $ 9,669
============ ============
Supplementary cash flow information
Interest paid $ 3,251 $ 3,320
Taxes paid 67 76
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 June 30, 2004 and December 31, 2003 were as
follows (in millions):
June 30, December 31,
2004 2003
-------------- --------------
(Unaudited)
Retail (a) $ 79,779 $ 80,015
Wholesale (b) 22,293 22,618
Other (c) 7,747 8,661
-------------- --------------
Total finance receivables, net of unearned income 109,819 111,294
Less: Allowance for credit losses (2,212) (2,382)
-------------- --------------
Finance receivables, net $ 107,607 $ 108,912
============== ==============
(a) At June 30, 2004 and December 31, 2003, includes about $15.3 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 June 30, 2004 and December 31, 2003, includes about $1.4 billion and
$800 million, respectively, 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 June 30, 2004 and December 31, 2003, includes approximately
$100 million of other receivables with dealers that are reported as
consolidated subsidiaries of Ford effective July 1, 2003. Ford generally
does not guarantee these receivables.
NOTE 2. SALES OF RECEIVABLES
Retained Interest
Components of retained interest in receivables sold in securitization
transactions at June 30, 2004 and December 31, 2003 were as follows (in
millions):
June 30, December 31,
2004 2003
-------------- -------------
(Unaudited)
Wholesale receivables sold to securitization entities $ 12,875 $ 9,249
Subordinated securities 1,326 1,568
Interest-only strips 1,100 1,169
Restricted cash held for benefit of securitization entities 541 511
Senior securities 554 520
-------------- -------------
Retained interest in securitized assets $ 16,396 13,017
============== =============
-4-
ITEM 1. FINANCIAL STATEMENTS (Continued)
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 2. SALES OF RECEIVABLES (Continued)
Most of the retained interest in sold wholesale receivables ($11.4 billion
and $8.0 billion at June 30, 2004 and December 31, 2003, respectively)
represents our undivided interest in wholesale receivables that are available to
support the issuance of additional securities by a securitization entity; the
balance represents credit enhancements. Interest-only strips represent the
present value of monthly collections on the sold finance receivables in excess
of amounts needed by the SPE (securitization trust) to pay principal and
interest to investors and servicing fees that will be realized by us.
Investments in subordinated securities and restricted cash are senior to
interest-only strips for credit enhancement purposes.
Retained interests are recorded at fair value. For wholesale receivables,
book value approximates fair value because of their short-term maturities. The
fair values of senior and subordinated securities are estimated based on market
prices. In determining the fair value of interest-only strips, we discount the
present value of the projected cash flows retained at various discount rates
based on economic factors in individual countries.
Investment and Other Income
The following table summarizes the activity related to off-balance sheet
sales of receivables reported in investment and other income for the periods
ended June 30 (in millions):
Second Quarter First Half
------------------- ---------------------
2004 2003 2004 2003
--------- --------- ---------- ----------
(Unaudited) (Unaudited)
Net gain on sales of receivables $ 69 $ 51 $ 130 $ 284
Interest income on sold wholesale receivables
and retained securities 166 197 305 407
Servicing fees 111 179 230 376
Excess spread and other 235 245 465 496
--------- --------- ---------- ----------
Total investment income related to sales of receivables $ 581 $ 672 $ 1,130 $ 1,563
========= ========= ========== ==========
Securitization Special Purpose Entities
We use SPEs, including on-balance sheet SPEs, as a source of funds for our
operations. At June 30, 2004, about $15.3 billion of retail installment
receivables reported on our balance sheet have been sold for legal purposes to
securitization SPEs and are available only for repayment of debt issued by those
entities and to pay other securitization investors and other participants. These
receivables are not available to pay our obligations or the claims of our
creditors. The debt issued by the SPEs, which includes both asset-backed
commercial paper and medium- term notes, is payable solely out of collections on
these receivables and is not our legal obligation; these issuances, for
financial statement reporting purposes, are reported as debt on our balance
sheet.
-5-
ITEM 1. FINANCIAL STATEMENTS (Continued)
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 3. DEBT
Debt at June 30, 2004 and December 31, 2003 was as follows (in millions):
Interest Rates
-----------------------------------
Average Weighted-
Contractual (a) Average (b)
----------------- ----------------- June 30, December 31,
2004 2003 2004 2003 2004 2003
-------- -------- -------- -------- -------------- ---------------
(Unaudited)
Short-term debt
Commercial paper 1.4% 1.9% $ 7,953 $ 6,095
Asset-backed commercial paper (c) 1.1% 1.2% 9,150 8,984
Floating rate demand notes 2.3% 2.8% 7,829 7,328
Other short-term debt (d) 5.9% 5.9% 2,252 2,290
Total short-term debt 1.9% 2.3% 2.2% 2.5% -------------- ---------------
27,184 24,697
-------------- ---------------
Long-term debt
Senior indebtedness
Notes payable within one year (e) 31,391 29,534
Notes payable after one year (f) 79,755 95,474
Unamortized discount (60) (53)
-------------- ---------------
Total long-term debt (g) 5.9% 5.8% 4.0% 4.2% 111,086 124,955
-------------- ---------------
Total debt 5.1% 5.2% 3.7% 3.9% $ 138,270 $ 149,652
============== ===============
(a) Second Quarter 2004 and Fourth Quarter 2003 average contractual rates
excluding the effect of interest rate swap agreements.
(b) Second Quarter 2004 and Fourth Quarter 2003 weighted-average rates
including the effect of interest rate swap agreements. Second Quarter
2004 long-term rate includes swap income of $28 million related to
non-designated interest rate swaps, which is reflected in other income.
(c) Amounts represent asset-backed commercial paper issued by FCAR Owner
Trust ("FCAR") which is payable solely out of collections on the
receivables supporting FCAR's assets and is not our legal obligation.
(d) Includes $65 million and $54 million with affiliated companies at
June 30, 2004 and December 31, 2003, respectively.
(e) Includes $51 million and $2 million with affiliated companies at
June 30, 2004 and December 31, 2003, respectively.
(f) Includes $53 million and $133 million with affiliated companies at
June 30, 2004 and December 31, 2003, respectively. Also includes debt of
$752 million at June 30, 2004 and $324 million at December 31, 2003,
which is payable solely out of collections on receivables and is not our
legal obligation.
(g) The average contractual and weighted-average interest rates for total
long-term debt represent the rates for both notes payable within one year
and notes payable after one year.
-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 $133 million at June 30, 2004) to any potential
losses associated with these VIEs is limited to our equity investments and,
where applicable, receivables due from the VIEs.
On-balance sheet securitization SPEs, discussed in Note 2, are also
considered VIEs under FIN 46R.
We also sell receivables to bank-sponsored asset-backed commercial paper
issuers that are SPEs of the sponsor bank and are not consolidated by us. At
June 30, 2004, these SPEs held about $4.5 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 periods ended June 30 (in millions):
Second Quarter First Half
------------------------- -------------------------
2004 2003 2004 2003
----------- ------------- ------------ ------------
(Unaudited) (Unaudited)
Retained earnings, beginning balance $ 6,700 $ 8,237 $ 6,912 $ 8,795
Net income 897 401 1,585 843
Dividends (1,000) (900) (1,900) (1,900)
------------ ------------ ------------ ------------
Retained earnings, ending balance $ 6,597 $ 7,738 $ 6,597 $ 7,738
============ ============ ============ ============
The following table summarizes comprehensive income for the periods ended June 30 (in millions):
Second Quarter First Half
------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ------------- -----------
(Unaudited) (Unaudited)
Net income $ 897 $ 401 $ 1,585 $ 843
Other comprehensive (loss)/income (33) 194 (13) 395
------------ ------------ ------------- -----------
Total comprehensive income $ 864 $ 595 $ 1,572 $ 1,238
============ ============ ============= ===========
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
The fair value of guarantees and indemnifications issued since
December 31, 2002 are recorded in the financial statements and are de minimis.
At June 30, 2004, the following guarantees and indemnifications were issued and
outstanding:
Guarantees of certain obligations of unconsolidated and other affiliates: In
some cases, we have guaranteed debt and other financial obligations of
unconsolidated affiliates, including joint ventures and Ford. Expiration dates
vary, and guarantees will terminate on payment and/or cancellation of the
obligation. A payment would be triggered by failure of the guaranteed party to
fulfill its obligation covered by the guarantee. In some circumstances, we are
entitled to recover from 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 $136 million.
Indemnifications: In the ordinary course of business, we execute contracts
that include indemnifications typical in the industry, which are related to
several types of transactions, such as debt funding, derivatives, the sale of
receivables, and the sale of businesses. These indemnifications might include
claims related to any of the following: privacy rights; governmental regulations
and employment-related issues; 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
the terms of a 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, for the periods ended June 30, the ineffective
portion of both fair value and cash flow hedges, amortization of mark-to-market
adjustments associated with hedging relationships that have been terminated, and
mark-to-market adjustments that reflect changes in interest rates for
non-designated hedging activity (in millions):
Second Quarter First Half
------------------ ------------------
2004 2003 2004 2003
-------- --------- -------- ---------
(Unaudited) (Unaudited)
Income before income taxes $ 88 $ 99 $ 135 $ 120
Balance Sheet Impact
The fair value of derivatives reflects the price that a third party would be
willing to pay or receive in arm's length transactions for assuming our position
in the derivatives transaction and includes mark-to-market adjustments to
reflect the effects of changes in interest rates, accrued interest and, for
derivatives with a foreign currency component, a revaluation adjustment. The
following table summarizes, at June 30, 2004 and December 31, 2003, the
estimated fair value of our derivative financial instruments, taking into
consideration the effects of legally enforceable netting agreements, which allow
us to settle positive and negative positions with the same counterparty on a net
basis (in millions):
June 30, 2004 December 31, 2003
---------------------------- ---------------------------
Fair Value Fair Value Fair Value Fair Value
Assets Liabilities Assets Liabilities
-------------- ------------- ------------- -------------
(Unaudited)
Foreign currency swaps $ 3,534 $ 771 $ 6,257 $ 1,119
Interest rate swaps 2,598 215 3,930 213
Foreign currency forwards and options - - 24 -
Impact of netting agreements (350) (350) (345) (345)
-------------- ------------- ------------- -------------
Total derivative financial instruments $ 5,782 $ 636 $ 9,866 $ 987
============== ============= ============= =============
Period-to-period changes in the derivative asset and liability amounts may
be impacted by net interest or foreign currency settlements, changes in foreign
currency and interest rates, and the notional amount of derivatives outstanding.
-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.
Key operating data for our operating segments for the periods ended June 30
or at June 30 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)
Second Quarter 2004
Revenue $ 3,974 $ 997 $ 88 $ (398) $ (310) $ 4,661
Income
Income before income taxes 1,114 220 88 - 88 1,422
Provision for income taxes 414 77 29 - 29 520
Income from continuing operations 700 143 58 - 58 901
Other disclosures
Depreciation on operating leases 1,094 148 - - - 1,242
Interest expense 1,101 438 - (244) (244) 1,295
Provision for credit losses 55 21 - - - 76
Second Quarter 2003
Revenue $ 4,769 $ 894 $ 99 $ (624) $ (525) $ 5,138
Income
Income before income taxes 403 159 99 - 99 661
Provision for income taxes 173 56 29 - 29 258
Income from continuing operations 230 103 68 - 68 401
Other disclosures
Depreciation on operating leases 1,680 142 - - - 1,822
Interest expense 1,455 414 - (390) (390) 1,479
Provision for credit losses 485 57 - - - 542
-10-
ITEM 1. FINANCIAL STATEMENTS (Continued)
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 8. SEGMENT INFORMATION (Continued)
Unallocated/Eliminations
------------------------------------
North Unallocated Effect of Ford Credit
America International Risk Sales of Financial
Segment Segment Management Receivables Total Statements
---------- -------------- ---------- ------------- --------- --------------
(Unaudited)
First Half 2004
Revenue $ 8,019 $ 1,961 $ 135 $ (842) $ (707) $ 9,273
Income
Income before income taxes 1,928 446 135 - 135 2,509
Provision for income taxes 716 156 46 - 46 918
Income from continuing operations 1,212 290 88 - 88 1,590
Other disclosures
Depreciation on operating leases 2,295 254 - - - 2,549
Interest expense 2,239 898 - (513) (513) 2,624
Provision for credit losses 315 62 - - - 377
Finance receivables (including net 135,909 38,741 371 (45,776) (45,405) 129,245
investment in operating leases)
Total assets 153,036 43,093 371 (29,380) (29,009) 167,120
First Half 2003
Revenue $ 9,887 $ 1,811 $ 127 $ (1,165) $ (1,038) $ 10,660
Income
Income before income taxes 955 313 120 - 120 1,388
Provision for income taxes 397 110 35 - 35 542
Income from continuing operations 558 203 82 - 82 843
Other disclosures
Depreciation on operating leases 3,674 276 - - - 3,950
Interest expense 3,029 834 7 (872) (865) 2,998
Provision for credit losses 958 105 - - - 1,063
Finance receivables (including net 150,821 37,857 755 (55,997) (55,242) 133,436
investment in operating leases)
Total assets 174,792 40,920 755 (41,467) (40,712) 175,000
-11-
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
more than 10 million customers and 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.
-12-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
New Developments
Sales Branch Integration
On May 17, 2004, Ford Credit announced that it intends to create an
integrated sales platform for its sales operations in the U.S. and Canada over
the next two years. This effort will have the impact of consolidating our
existing 163 branches into 78 multi-brand sales branches that will support sales
activities for Ford Credit, Volvo Car Finance, PRIMUS, Jaguar Credit, Land Rover
Capital Group, Mazda Credit and Commercial Lending Services. Although the
operations will be integrated, individual brand identities will be retained. In
addition, regional sales offices are in the process of being consolidated,
which will result in 11 new regions from the existing 18.
Results of Operations
Second Quarter 2004 Compared with Second Quarter 2003
In the second quarter of 2004, we earned $897 million, up $496 million or
124% compared with earnings of $401 million a year ago. Our consolidated pre-tax
income from continuing operations was $1,422 million, up $761 million or 115%
from earnings of $661 million a year ago. The increase in earnings primarily
resulted from improvement in credit loss performance (about $450 million) and
improved financing margin (about $350 million), offset partially by the impact
of lower off-balance sheet securitizations and whole-loan sale transactions
(about $100 million). The improved financing margin primarily resulted from the
improvement in lease residual performance (about $200 million) and the favorable
impact of the low interest rate environment. The improvement in lease residual
performance primarily resulted from higher used vehicles prices and a
reduction in the percentage of vehicles returned to us by dealers at the end of
the lease period.
Results of our operations by business segment for the second quarter of 2004
and 2003 are shown below:
Second Quarter
-----------------------------------------------------
2004 Over/
(Under) 2003
---------------------------
2004 2003 Amount Percentage
----------- ---------- ---------- ---------------
Income before income taxes (in millions)
North America Segment............................ $ 1,114 $ 403 $ 711 176%
International Segment............................ 220 159 61 38
Unallocated/eliminations......................... 88 99 (11)
--------- -------- ---------
Pre-tax income from continuing operations..... 1,422 661 761 115
Provision for income taxes and minority interests.. (521) (260) (261)
Loss from discontinued/held-for-sale operations.... (4) 0 (4)
--------- -------- ---------
Total net income.............................. $ 897 $ 401 $ 496 124%
========= ======== =========
North America Segment income before income taxes in the second quarter of
2004 was up $711 million compared with the second quarter of 2003. This increase
primarily reflected a lower provision for credit losses and improved financing
margin. The lower provision for credit losses resulted from fewer repossessions
and a lower average loss per repossession. The improvement in financing margin
primarily related to lower depreciation expense on operating leases and the
favorable impact of the low interest rate environment. The lower depreciation
expense reflected lower levels of operating leases, improved residual values and
lower return rates.
International Segment income before income taxes in the second quarter of
2004 was up $61 million compared with the second quarter of 2003. This increase
primarily reflected favorable changes in currency exchange rates in Europe and
Asia-Pacific, lower operating costs in Europe and gains on the sale of our
full-service leasing (insurance and maintenance of vehicles offered in
conjunction with a vehicle lease to business lessees) portfolios in the United
Kingdom and Italy.
Income before income taxes in the unallocated/eliminations category in the
second quarter of 2004 was down $11 million compared with the second quarter of
2003. The decline primarily reflected a reduction in the net favorable market
valuation of derivative instruments and associated exposures.
-13-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
First Half 2004 Compared with First Half 2003
In the first half of 2004, we earned $1,585 million, up $742 million or 88%
compared with earnings of $843 million a year ago. Our consolidated pre-tax
income from continuing operations was $2,509 million, up $1,121 million or 81%
from earnings of $1,388 million a year ago. The increase in earnings primarily
resulted from improvement in credit loss performance and improved financing
margin, offset partially by the impact of lower off-balance sheet
securitizations and whole-loan sale transactions. The improved financing margin
primarily resulted from the improvement in lease residual performance and the
favorable impact of the low interest rate environment. The improvement in lease
residual performance primarily resulted from higher used vehicles prices and a
reduction in the percentage of vehicles returned to us by dealers at the end of
the lease period.
Results of our operations by business segment for the first half of 2004 and
2003 are shown below:
First Half
----------------------------------------------------
2004 Over/
(Under) 2003
--------------------------
2004 2003 Amount Percentage
----------- ---------- ---------- --------------
Income before income taxes (in millions)
North America Segment............................ $ 1,928 $ 955 $ 973 102%
International Segment............................ 446 313 133 42
Unallocated/eliminations......................... 135 120 15
----------- ---------- ----------
Pre-tax income from continuing operations..... 2,509 1,388 1,121 81
Provision for income taxes and minority interests.. (919) (545) (374)
Loss from discontinued/held-for-sale operations.... (5) 0 (5)
----------- ---------- ----------
Total net income.............................. $ 1,585 $ 843 $ 742 88%
=========== ========== ==========
North America Segment income before income taxes in the first half of 2004
was up $973 million compared with the first half of 2003. This increase
primarily reflected a lower provision for credit losses and improved financing
margin, offset partially by lower income related to sales of receivables. The
lower provision for credit losses primarily resulted from fewer repossessions
and a lower average loss per repossession. The improvement in financing margin
primarily related to lower depreciation on operating leases and the favorable
impact of the low interest rate environment. The lower depreciation expense
reflected lower levels of operating leases, improved residual values and lower
return rates. The reduction in sales of receivables income primarily reflected
lower sales of receivables and lower outstanding off-balance sheet receivables.
International Segment income before income taxes in the first half of 2004
was up $133 million compared with the first half of 2003. This increase
primarily reflected favorable changes in currency exchange rates in Europe and
Asia-Pacific, lower operating costs in Europe and the sale of our full-service
leasing portfolios in the United Kingdom and Italy.
Income before income taxes in the unallocated/eliminations category in the
first half of 2004 was up $15 million compared with the first half of 2003. The
improvement primarily reflected the net favorable market valuation of derivative
instruments and associated exposures.
-14-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
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:
Second Quarter First Half Full Year
-------------- ---------- -----------------------
2004 2003 2004 2003 2003 2002 2001 2000
------ ------- ---- ---- ---- ---- ---- ----
(in thousands)
Worldwide
Retail installment............. 654 696 1,290 1,373 2,805 3,215 4,441 3,728
Operating and finance leases... 144 143 259 279 487 775 1,050 1,228
----- ------- ----- ----- ----- ----- ----- -----
Total financing volume....... 798 839 1,549 1,652 3,292 3,990 5,491 4,956
===== ======= ===== ===== ===== ===== ===== =====
North America Segment
United States.................. 472 491 900 963 1,980 2,512 3,819 3,525
Canada......................... 52 60 88 101 197 212 227 210
----- ------- ----- ----- ----- ----- ----- -----
Total North America Segment.. 524 551 988 1,064 2,177 2,724 4,046 3,735
International Segment
Europe......................... 209 223 422 444 836 917 988 795
Other international............ 65 65 139 144 279 349 457 426
----- ------- ----- ----- ----- ----- ----- -----
Total International Segment.. 274 288 561 588 1,115 1,266 1,445 1,221
----- ------- ----- ----- ----- ----- ----- -----
Total financing volume....... 798 839 1,549 1,652 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:
Second Quarter First Half Full Year
-------------- ------------- -----------------------------
2004 2003 2004 2003 2003 2002 2001 2000
------ ------- ----- ------- ----- ------ ------ ------
United States
Financing share - Ford, Lincoln and Mercury
Retail installment and lease.......... 39% 34% 38% 35% 39% 41% 54% 51%
Wholesale............................. 78 83 79 83 82 85 84 84
Europe
Financing share - Ford
Retail installment and lease.......... 28% 32% 28% 31% 31% 34% 37% 32%
Wholesale............................. 97 96 97 97 97 97 97 97
North America Segment
Our total financing contract placement volumes were 524,000 contracts in the
second quarter of 2004, down 27,000 contracts or 5% 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 39% in the second quarter of 2004 compared with 34% 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 business. The increase in non-subvened business was a result of our
additional marketing programs and competitive pricing actions related to this
business.
In the second quarter of 2004, wholesale market share was 78% compared with
83% a year ago. The decline primarily reflected the impact of pricing actions by
competitor financing sources. In the second quarter of 2004, we launched dealer
loyalty programs intended to improve our wholesale market share.
In the first half of 2004, our total financing contract placement volumes
were 988,000, down 76,000 contracts or 7% compared with a year ago. This overall
decrease reflected our reduction of used and non-Ford retail installment
financing as a result of our continued focus on supporting Ford's brands.
-15-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
International Segment
In the second quarter of 2004, our total financing contract placement
volumes were 274,000, down 14,000 contracts or 5% compared with a year ago. This
decline resulted from lower volumes in Britain, primarily from lower
Ford-sponsored marketing incentives.
In the first half of 2004, our total financing contract placement volumes
were 561,000, down 27,000 contracts or 5% compared with a year ago. This overall
decrease resulted primarily from the same factors described in the preceding
paragraph.
Financial Condition
Finance Receivables and Operating Leases
Our financial condition is impacted significantly by the level of our
receivables, which are shown below:
December 31,
June 30, --------------------------------------
Receivables 2004 2003 2002 2001 2000
------ ------ ------- -------- -------
(in billions)
On-Balance Sheet
(including on-balance sheet securitizations)
Finance receivables
Retail installment.................. $ 77.7 $ 77.8 $ 68.4 $ 83.4 $ 79.9
Wholesale........................... 22.2 22.5 16.4 15.4 33.7
Other............................... 7.7 8.6 9.8 9.1 8.4
------- ------- --------- -------- --------
Total finance receivables, net.... 107.6 108.9 94.6 107.9 122.0
Net investment in operating leases.... 21.6 23.2 31.3 37.2 36.5
------- ------- --------- -------- --------
Total on-balance sheet............ $ 129.2 $ 132.1 $ 125.9 $ 145.1 $ 158.5
======= ======= ========= ======== ========
Memo: Allowance for credit losses
included above....................... $ 2.7 $ 3.0 $ 3.2 $ 2.8 $ 1.6
Securitized Off-Balance Sheet
Finance receivables
Retail installment.................. $ 23.9 $ 29.1 $ 48.9 $ 41.2 $ 26.0
Wholesale........................... 21.9 20.3 22.5 17.5 2.3
Other............................... -- -- -- -- --
------- ------- --------- -------- --------
Total finance receivables.......... 45.8 49.4 71.4 58.7 28.3
Net investment in operating leases.... -- -- -- -- 0.1
------- ------- --------- -------- --------
Total securitized off-balance sheet $ 45.8 $ 49.4 $ 71.4 $ 58.7 $ 28.4
======= ======= ========= ======== ========
Managed
Finance receivables
Retail installment.................. $ 101.6 $ 106.9 $ 117.3 $ 124.6 $ 105.9
Wholesale........................... 44.1 42.8 38.9 32.9 36.0
Other............................... 7.7 8.6 9.8 9.1 8.4
------- ------- --------- -------- --------
Total finance receivables......... 153.4 158.3 166.0 166.6 150.3
Net investment in operating leases.... 21.6 23.2 31.3 37.2 36.6
------- ------- --------- -------- --------
Total managed................... $ 175.0 $ 181.5 $ 197.3 $ 203.8 $ 186.9
======= ======= ========= ======== ========
Serviced.............................. $ 180.5 $ 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
June 30, 2004, were $129.2 billion, down $2.9 billion from year-end 2003. The
decrease primarily reflected the impact of lower retail and lease placement
volumes.
At June 30, 2004, on-balance sheet receivables included $15.3 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.
-16-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
Securitized Off-Balance Sheet Receivables. Total securitized off-balance
sheet receivables at June 30, 2004, were $45.8 billion, down $3.6 billion from
year-end 2003. The decrease primarily reflected the slower pace of off-balance
sheet securitizations.
Managed Receivables. Total managed receivables at June 30, 2004, were
$175.0 billion, down $6.5 billion from year-end 2003.
Serviced Receivables. Serviced receivables include our managed receivables
and receivables that we sold in whole-loan sale transactions. We continue to
service the receivables sold in whole-loan sale transactions. We retain no
interest in the receivables, however, and all credit risk associated with the
receivables is transferred to the buyer.
Credit Risk
Credit risk is the possibility of loss from a customer's failure to make
payments according to contract terms. Credit risk has a significant impact on
our business. We actively manage the credit risk of our consumer and
non-consumer portfolios to balance our level of risk and return. The allowance
for credit losses reflected on our balance sheet is our estimate of the probable
credit losses for receivables and leases that are impaired at the points in time
shown on our balance sheet.
-17-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
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.
Second Quarter First Half Full Year
----------------- ---------------- ---------------------------
2004 2003 2004 2003 2003 2002 2001
------- -------- -------- ------- ------- ------- ---------
(in millions)
Credit Losses
On-Balance Sheet
Retail installment and lease................. $ 326 $ 422 $ 659 $ 915 $ 1,871 $ 2,292 $ 2,052
Wholesale.................................... 6 16 9 17 148 40 33
Other........................................ -- 14 (1) 13 25 30 24
------- -------- -------- -------- --------- -------- ---------
Total on-balance sheet..................... 332 452 667 945 2,044 2,362 2,109
Reacquired Receivables (retail)............... 13 18 38 18 92 -- --
------- -------- -------- -------- --------- -------- ---------
Total on-balance sheet (including reacquired $ 345 $ 470 $ 705 $ 963 $ 2,136 $ 2,362 $ 2,109
receivables)................................ ======= ======== ======== ======== ========= ======== =========
Securitized Off-Balance Sheet
Retail installment and lease................. $ 101 $ 150 $ 234 $ 343 $ 677 $ 448 $ 218
Wholesale.................................... -- 3 -- 3 -- 6 1
Other........................................ -- -- -- -- -- -- --
------- -------- -------- -------- --------- -------- ---------
Total securitized off-balance sheet........ $ 101 $ 153 $ 234 $ 346 $ 677 $ 454 $ 219
======= ======== ======== ======== ========= ======== =========
Managed
Retail installment and lease.................. $ 440 $ 590 $ 931 $ 1,276 $ 2,640 $ 2,740 $ 2,270
Wholesale..................................... 6 19 9 20 148 46 34
Other......................................... -- 14 (1) 13 25 30 24
------- -------- -------- -------- --------- -------- ---------
Total managed............................... $ 446 $ 623 $ 939 $ 1,309 $ 2,813 $ 2,816 $ 2,328
======= ======== ======== ======== ========= ======== =========
Loss-to-Receivables Ratios
On-Balance Sheet (including reacquired receivables)*
Retail installment and lease.................. 1.37% 1.82% 1.41% 1.94% 1.97% 2.05% 1.74%
Wholesale..................................... 0.11 0.35 0.08 0.19 0.79 0.25 0.12
Total including other........................ 1.07% 1.50% 1.09% 1.56% 1.67% 1.72% 1.36%
Memo: On-Balance Sheet (excluding reacquired
receivables).................................. 1.03% 1.44% 1.03% 1.53% 1.60% 1.72% 1.36%
Managed
Retail installment and lease.................. 1.42% 1.70% 1.48% 1.81% 1.91% 1.73% 1.43%
Wholesale..................................... 0.05 0.18 0.04 0.10 0.37 0.13 0.10
Total including other....................... 1.02% 1.32% 1.06% 1.37% 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.
-18-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
Credit Losses -- On-Balance Sheet. In the second quarter of 2004, credit
losses for our on-balance sheet portfolio excluding credit losses on reacquired
receivables declined $120 million or 27% from a year ago reflecting improved
loss performance in our U.S. retail installment and operating lease portfolio
resulting from lower repossessions and a lower average loss per repossession.
Our on-balance sheet loss-to-receivables ratio including reacquired receivables
in the second quarter of 2004 was 1.07%, down from 1.50% in 2003, reflecting
improvements in our credit loss performance and lower on-balance sheet
receivables at Fairlane Credit, LLC ("Fairlane Credit") and Triad Financial
Corporation ("Triad"), whose receivables include primarily contracts with
sub-prime customers.
In the first half of 2004, net credit losses for our on-balance sheet
portfolio excluding credit losses on reacquired receivables were $667 million,
down $278 million or 29% from a year ago for the same reasons stated above. The
on-balance sheet loss-to-receivables ratio including reacquired receivables for
the first half of 2004 was 1.09%, down from 1.56% in the first half of 2003.
Credit Losses -- Securitized Off-Balance Sheet. In the second quarter of
2004, credit losses for our securitized off-balance sheet portfolio decreased
$52 million or 34% 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. In the first half of 2004, credit losses for our securitized
off-balance sheet portfolio declined $112 million or 32% from a year ago.
Credit Losses -- Managed. In the second quarter of 2004, credit losses for
our managed portfolio decreased $177 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 1.02%, down from 1.32% a
year ago. In the first half of 2004, credit losses for our managed portfolio
declined $370 million or 28% from a year ago.
Ford Credit U.S. Retail and Operating Lease
The following table shows the loss-to-receivables, repossession, bankruptcy
and delinquency statistics for our Ford, Lincoln and Mercury brand U.S. retail
installment sale and lease portfolio, which was approximately 60% of our
worldwide-managed portfolio of retail receivables and net investment in
operating leases at June 30, 2004.
Second Quarter First Half Full Year
---------------- ---------------- -------------------------------------
2004 2003 2004 2003 2003 2002 2001 2000
-------- ------- ------- -------- -------- ------- -------- --------
On-Balance Sheet
Credit losses (in millions)........ $ 164 $ 254 $ 367 $ 512 $ 1,088 $ 1,180 $ 1,135 $ 806
Loss-to-receivables ratios
(including reacquired receivables) 1.21% 1.95% 1.35% 2.03% 2.04% 1.87% 1.61% 1.12%
Managed
Credit losses (in millions)........ $ 200 $ 352 $ 469 $ 753 $ 1,530 $ 1,520 $ 1,304 $ 865
Loss-to-receivables ratios......... 1.16% 1.72% 1.33% 1.77% 1.89% 1.50% 1.31% 0.98%
Other Metrics - Serviced
Repossessions (in thousands)....... 38 45 84 96 200 199 174 141
Repossession ratios................ 2.72% 2.91% 2.98% 3.01% 3.27% 2.79% 2.45% 2.19%
Average loss per repossession...... $ 6,450 $ 7,500 $ 6,650 $ 7,500 $ 7,350 $ 6,960 $ 6,600 $ 5,800
New bankruptcy filings (in
thousands)........................ 23 30 46 58 107 118 91 71
Over-60-day delinquency ratios..... 0.15% 0.33% 0.18% 0.38% 0.35% 0.36% 0.40% 0.30%
On-Balance Sheet. Credit losses declined $90 million in the second 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 second quarter. In addition,
lower lease-end termination volumes have contributed to higher used vehicle
prices, reducing the average loss per repossession.
-19-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
Managed. Credit losses declined $152 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. In the second quarter of 2004, the
total number of repossessions decreased 7,000 units compared with a year ago.
Our repossession ratio decreased 19 basis points reflecting about a 14%
reduction in the average number of outstanding contracts compared with 2003. Our
average loss per repossession was $6,450, down $1,050 per unit or 14% from a
year ago.
In the first half of 2004, our total number of repossessions was 84,000,
down 12% from a year ago. Our first half repossession ratio was 2.98%, down from
3.01% a year ago. The average loss per repossession for the first half was
$6,650, down from $7,500 in 2003.
In the second quarter of 2004, the over-60-day delinquency ratio was 0.15%,
down from 0.33% a year ago. For quarterly ratios, delinquencies are expressed as
a percent of the end-of-period accounts outstanding for non-bankrupt accounts.
Full year delinquency ratios are expressed as an average of the quarterly ratios
for non-bankrupt accounts.
Allowance for Credit Losses
Our allowance for credit losses and our allowance for credit losses as a
percentage of end-of-period net receivables, for our on-balance sheet portfolio,
are shown below:
December 31,
June 30, -------------------------------------
2004 2003 2002 2001 2000
--------- ------- ------- --------- ---------
(in billions)
Allowance for Credit Losses
Retail installment and lease............ $ 2.6 $ 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.... $ 2.7 $ 3.0 $ 3.2 $ 2.8 $ 1.6
========= ======== ======== ======== =========
As a Percentage of End-of-Period Net
Receivables
Retail installment and lease............ 2.53% 2.76% 2.92% 2.10% 1.28%
Wholesale............................... 0.47 0.71 1.36 1.03 0.37
Other................................... 0.49 0.67 0.62 0.66 0.24
Total................................ 2.05% 2.28% 2.52% 1.89% 1.03%
At June 30, 2004, our allowance for credit losses was down about
$300 million compared with year-end 2003, reflecting primarily improving
portfolio performance, especially in the United States, and the impact of lower
receivables.
-20-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
Residual Risk
We are exposed to residual risk on operating leases, Red Carpet Option
contracts and similar balloon payment products where the customer has the right
to return the financed vehicle to us. Our residual risk on retail lease and
other contracts is composed of two types of risk: residual value risk and return
rate risk. Residual value risk is the possibility that the actual net proceeds
we realize upon the sale of returned vehicles at contract termination, which is
referred to as the residual value of these vehicles, will be lower than our
projection of these values. Return rate risk is the possibility that the
percentage of vehicles returned to us at contract termination will be higher
than we expect.
Retail Operating Lease Experience
We use various statistics to monitor our residual value risk and return rate
risk. Placement volume measures the number of leases we purchase each year.
Termination volume measures the number of vehicles for which the lease has ended
in each year. Return rates are the percentage of vehicles that are returned to
us at the end of the terminated lease and not purchased by either the customer
or the dealer. The following table shows placement volumes, termination volumes
and return rates for our North America Segment, which accounted for 92% of our
total net investment in operating leases at June 30, 2004:
Second Quarter First Half Full Year
---------------- --------------- ---------------------------------
2004 2003 2004 2003 2003 2002 2001 2000
------ -------- ------- ------ ------- ------ ------- -------
Placement Volume (in thousands)
Ford, Lincoln and Mercury Cars... 12 18 24 37 57 104 163 205
Ford, Lincoln and Mercury Trucks. 54 38 98 80 144 261 408 538
Jaguar, Land Rover and Volvo*.... 15 13 25 22 48 95 90 53
Other............................ 11 6 20 7 25 9 17 23
-- -- --- --- --- --- --- ---
Total North America Segment... 92 75 167 146 274 469 678 819
== == === === === === === ===
Termination Volume (in thousands)
Ford, Lincoln and Mercury Cars... 39 51 74 101 167 169 151 154
Ford, Lincoln and Mercury Trucks. 69 121 142 237 412 486 366 360
Jaguar, Land Rover and Volvo*.... 16 15 28 27 55 48 34 28
Other............................ 4 6 8 11 20 34 80 87
--- --- --- --- --- --- --- ---
Total North America Segment... 128 193 252 376 654 737 631 629
=== === === === === === === ===
Return Rate
Ford, Lincoln and Mercury Cars... 75% 77% 77% 79% 78% 62% 58% 62%
Ford, Lincoln and Mercury Trucks. 49 70 53 70 68 66 66 63
Jaguar, Land Rover and Volvo*.... 57 56 56 54 54 43 45 51
Other............................ 53 54 53 55 55 50 60 69
Total North America Segment... 58% 70% 60% 71% 69% 63% 62% 63%
----------
* We first reported placement volumes for Land Rover in 2001.
In the second quarter of 2004, placement volumes were up 17,000 units
compared with a year ago. Termination volumes were down 65,000 units compared
with a year ago, largely related to lower contract placement volumes in 2001 and
2002. In the second quarter of 2004, return rates were down 12 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.
-21-
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
- ------------ -------------------------------- -------------------------- ---------------------- -------------------------
- ------------ ------------ ---------- -------- -------- ------- --------- ----- ------ --------- -------- ------ ---------
Date Long- Short- Trend Long- Short- Outlook Long- Short- Outlook Long- Short- Outlook
Term Term Term Term Term Term Term Term
- ------------ ------------ ---------- -------- -------- ------- --------- ----- ------ --------- -------- ------ ---------
Aug. 2001 A R-1 (low) Stable A+ F1 Negative A2 P-1 Negative A A-1 Negative
- ------------ ------------ ---------- -------- -------- ------- --------- ----- ------ --------- -------- ------ ---------
Sep. 2001 A R-1 (low) Stable A- F2 Negative A2 P-1 Negative A A-1 Negative
- ------------ ------------ ---------- -------- -------- ------- --------- ----- ------ --------- -------- ------ ---------
Oct. 2001 A (low) R-1 (low) Stable A- F2 Negative A2 P-1 Negative BBB+ A-2 Stable
- ------------ ------------ ---------- -------- -------- ------- --------- ----- ------ --------- -------- ------ ---------
Jan. 2002 A (low) R-1 (low) Stable BBB+ F2 Negative A3 P-2 Negative BBB+ A-2 Negative
- ------------ ------------ ---------- -------- -------- ------- --------- ----- ------ --------- -------- ------ ---------
Oct. 2002 A (low) R-1 (low) Negative BBB+ F2 Negative A3 P-2 Negative BBB A-2 Negative
- ------------ ------------ ---------- -------- -------- ------- --------- ----- ------ --------- -------- ------ ---------
Apr. 2003 BBB (high) R-1 (low) Stable BBB+ F2 Negative A3 P-2 Negative BBB A-2 Negative
- ------------ ------------ ---------- -------- -------- ------- --------- ----- ------ --------- -------- ------ ---------
Nov. 2003 BBB (high) R-1 (low) Stable BBB+ F2 Negative A3 P-2 Negative BBB- A-3 Stable
- ------------ ------------ ---------- -------- -------- ------- --------- ----- ------ --------- -------- ------ ---------
May 2004 BBB (high) R-1 (low) Stable BBB+ F2 Stable A3 P-2 Negative BBB- A-3 Stable
- ------------ ------------ ---------- -------- -------- ------- --------- ----- ------ --------- -------- ------ ---------
- ----------
* NRSRO designation granted on February 27, 2003
-22-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
Funding
Our outstanding debt and securitized off-balance sheet funding was as
follows on the dates indicated:
December 31,
June 30, -------------------------------------------
2004 2003 2002 2001 2000
-------- --------- ------- ------- -------
(in billions)
Debt
Commercial paper-unsecured................ $ 8.0 $ 6.1 $ 8.2 $ 15.7 $ 42.3
Asset-backed commercial paper (FCAR)...... 9.2 9.0 -- -- --
Floating rate demand notes................ 7.8 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.................... 27.2 24.7 16.2 22.6 49.9
Long-term debt (including notes payable
within one year)......................... 111.1 125.0 124.1 123.2 95.7
------- ------- ------- ------- -------
Total debt............................. 138.3 149.7 140.3 145.8 145.6
Securitized Off-Balance Sheet Funding
Securitized off-balance sheet portfolio... 45.8 49.4 71.4 58.7 28.4
Retained interest......................... (16.4) (13.0) (17.6) (12.5) (3.7)
------- ------- ------- ------- -------
Total securitized off-balance sheet funding. 29.4 36.4 53.8 46.2 24.7
------- ------- ------- ------- -------
Total debt plus securitized off-balance
sheet funding......................... $ 167.7 $ 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...................................... 96% > 100% > 100% 87% 57%
Credit lines to total unsecured commercial
paper (including Ford bank lines).......... > 100 > 100 > 100 > 100 78
Securitized funding to managed receivables.. 24 25 27 23 13
Short-term debt and notes payable within
one year to total debt..................... 42 36 28 30 43
Short-term debt and notes payable within
one year to total capitalization........... 39 33 25 28 40
At June 30, 2004, unsecured commercial paper was up $1.9 billion compared
with year-end 2003, reflecting increased investor demand. At June 30, 2004,
total debt plus securitized off-balance sheet funding was down $18.4 billion
compared with year-end 2003, reflecting repayment of debt maturing in the second
quarter of 2004 and lower asset levels, which reduced our funding needs.
During the second quarter of 2004, we issued $2.2 billion of long-term debt
with maturities of one to 10 years, including about $600 million of unsecured
institutional funding and about $1.6 billion of unsecured retail bonds. In
addition, we realized proceeds of about $2.1 billion from sales of receivables
in off-balance sheet securitizations.
We expect our full-year 2004 public term funding requirements to be between
$13 billion and $19 billion. In the first half of 2004, we completed about
$8 billion of public term funding transactions. Because of significant available
liquidity and a relatively smaller balance sheet size, we plan, depending on
market conditions, to repurchase a portion of our outstanding debt securities
during the remainder of 2004.
-23-
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 June 30, 2004, our cash and cash equivalents
totaled $8.8 billion, compared with $15.7 billion at the end of 2003, down
$6.9 billion primarily reflecting second quarter 2004 debt maturities in excess
of new debt issuances. In the normal course of our funding transactions, we may
generate more proceeds than are necessary for our immediate funding needs. These
excess amounts are maintained primarily as highly liquid investments, provide
liquidity for our short-term funding obligations and give us flexibility in the
use of our other funding programs. Our cash and cash equivalents include
short-term U.S. Treasury bills, federal agency discount notes, A-1/P-1 (or
higher) rated commercial paper, and bank time deposits with investment grade
institutions. The average term of these investments is typically less than 60
days. We monitor our cash levels daily and adjust them as necessary to support
our short-term liquidity needs.
Conduit Program. We have entered into agreements with several bank-sponsored
commercial paper issuers ("conduits") under which such conduits are
contractually committed to purchase from us, at our option, up to $11.8 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 September 16, 2004 and June 23, 2005 and, in the past, have been
renewed on an annual basis. As of June 30, 2004, we had utilized approximately
$3.7 billion of these conduit commitments. These agreements do not contain
restrictive financial covenants (for example, debt-to-equity limitations or
minimum net worth requirements) or material adverse change clauses that would
relieve the conduit of its obligation to purchase receivables. However, they do
contain provisions that could terminate the unused portion of the purchase
commitments if the performance of the sold receivables deteriorates beyond
specified levels. Based on our experience, we do not expect any commitments to
be terminated due to these performance requirements. None of these arrangements
may be terminated based on a change in our credit rating.
-24-
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:
June 30, December 31,
-------------------- --------------------------------------
2004 2003 2003 2002 2001 2000
-------- ------- --------- -------- -------- -------
(in billions)
Back-up Credit Facilities
Ford Credit................................. $ 4.8 $ 6.4 $ 4.3 $ 8.6 $ 9.0 $ 20.0
FCE......................................... 2.9 3.4 3.4 5.3 4.6 4.7
Ford bank lines (available at Ford's option). 6.7 6.7 6.8 7.6 8.4 8.4
Asset-backed commercial paper lines.......... 18.6 16.4 18.6 13.6 12.5 1.4
------- ------- -------- ------- ------- -------
Total back-up facilities................ 33.0* 32.9* 33.1 35.1 34.5 34.5
Drawn amounts................................ (1.1) (1.2) (1.0) (0.9) (0.7) (0.9)
------- ------- -------- ------- ------- -------
Total available back-up facilities...... $ 31.9* $ 31.7* $ 32.1 $ 34.2 $ 33.8 $ 33.6
======= ======= ======== ======= ======= =======
* As of July 1
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
$7.7 billion at July 1, 2004. This includes $4.8 billion of Ford Credit
facilities ($3.9 billion global and $0.9 billion non-global) and $2.9 billion of
FCE facilities ($2.7 billion global and $0.2 billion non-global). Approximately
$1.1 billion of our total facilities were in use at July 1, 2004. These
facilities have various maturity dates. Of the $7.7 billion, about 42% of these
facilities are committed through June 30, 2009. Our global credit facilities may
be used at our option by any of our direct or indirect majority-owned
subsidiaries. FCE's global credit facilities may be used at its option by any of
its direct or indirect majority-owned subsidiaries. We or FCE, as the case may
be, will guarantee any such borrowings. All of the global credit facilities have
substantially identical contract terms (other than commitment amounts) and are
free of material adverse change clauses and restrictive financial covenants (for
example, debt-to-equity limitations, minimum net worth requirements and credit
rating triggers) that would limit our ability to borrow.
At Ford's option, approximately $6.7 billion of Ford's global lines of
credit may be used by any of its direct or indirect majority-owned subsidiaries
on a guaranteed basis. Ford also has the ability to transfer, on a
non-guaranteed basis, $2.5 billion of such credit lines to us and $518 million
to FCE.
Additionally, at July 1, 2004, banks provided $18.6 billion of contractually
committed liquidity facilities supporting two asset-backed commercial paper
programs; $18.2 billion supported our FCAR program and $425 million supported
our Motown NotesSM program. Facilities supporting our FCAR program increased to
$18.5 billion at July 12, 2004, reflecting additional bank commitments of
$250 million. 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 July 1, 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.
-25-
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:
Second Quarter First Half Full Year
----------------- ---------------- ---------------------------------
2004 2003 2004 2003 2003 2002 2001 2000
------- -------- ------- ------- ------ ------- ------- --------
(in billions)
Net Proceeds from Receivable Sales
North America Segment
Public retail............................. $ 1.7 $ -- $ 1.7 $ 5.7 $ 5.7 $ 15.5 $ 16.6 $ 18.8
Conduit................................... -- 0.5 0.7 1.1 1.8 2.5 6.2 --
Triad..................................... -- -- 0.6 0.9 1.7 1.1 -- --
Motown Notes SM 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............. 1.7 0.5 4.0 8.7 11.6 33.4 39.9 18.8
International Segment
Europe
Public................................... 0.3 0.8 0.7 1.1 1.5 2.2 0.7 0.7
Conduit.................................. 0.1 0.3 0.2 0.3 1.1 0.3 -- --
------ ----- ------ ------ ------ ------ ------ -----
Total Europe.......................... 0.4 1.1 0.9 1.4 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............. 0.4 1.1 1.3 1.9 4.1 3.0 0.9 0.7
------ ----- ------ ------ ------ ------ ------ -----
Net proceeds.......................... 2.1 1.6 5.3 10.6 15.7 36.4 40.8 19.5
Whole-loan sales.......................... -- 1.0 -- 3.0 5.4 4.9 -- --
------ ----- ------ ------ ------ ------ ------ -----
Total net proceeds.................... 2.1 2.6 5.3 13.6 21.1 41.3 40.8 19.5
Retained interest and other.................. 0.2 0.1 (0.5) (0.4) 0.2 (0.6) 11.7 2.1
------ ----- ------ ------ ------ ------ ------ -----
Total receivables sold................ 2.3 2.7 4.8 13.2 21.3 40.7 52.5 21.6
Prior period sold receivables, net of paydown
activity.................................... 49.0 59.9 46.5 49.4 35.4 35.6 6.2 6.8
------ ----- ------ ------ ------ ------ ------ -----
Total sold receivables outstanding at
the end of the relevant period...... 51.3 62.6 51.3 62.6 56.7 76.3 58.7 28.4
Memo:
Less: Receivables outstanding in whole-loan sale
transactions ................................. (5.5) (6.6) (5.5) (6.6) (7.3) (5.0) -- --
------ ----- ------ ------ ------ ------ ------ -----
Total securitized off-balance sheet
receivables............................ $45.8 $56.0 $45.8 $56.0 $49.4 $71.3 $58.7 $28.4
====== ===== ====== ====== ====== ====== ====== =====
At June 30, 2004, outstanding sold receivables totaled $51.3 billion, down
$11.3 billion or 18% compared with a year ago. This decrease primarily reflected
our lower funding requirements and the use of on-balance sheet securitizations.
In the second quarter of 2004, $2.3 billion of receivables were sold in
off-balance sheet transactions, down about $400 million from the second quarter
of 2003. In the first half of 2004, $4.8 billion of receivables were sold in
off-balance sheet transactions, down $8.4 billion or 64% compared with the first
half of 2003.
Our worldwide proceeds from the sale of retail and wholesale finance
receivables through off-balance sheet securitizations and whole-loan sale
transactions are shown below for the periods indicated:
Second Quarter First Half Full Year
-------------------- ------------------- ---------------------------------------
Receivable Type 2004 2003 2004 2003 2003 2002 2001 2000
- ------------------------------ -------- ---------- -------- --------- -------- -------- --------- ---------
(in billions)
Retail....................... $ 2.1 $ 1.6 $ 4.3 $ 9.6 $ 14.7 $ 31.6 $ 32.3 $ 19.2
Wholesale.................... -- -- 1.0 1.0 1.0 4.8 8.5 0.3
-------- -------- -------- -------- -------- -------- -------- --------
Net proceeds............... 2.1 1.6 5.3 10.6 15.7 36.4 40.8 19.5
Whole-loan................... -- 1.0 -- 3.0 5.4 4.9 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total net proceeds....... $ 2.1 $ 2.6 $ 5.3 $ 13.6 $ 21.1 $ 41.3 $ 40.8 $ 19.5
======== ======== ======== ======== ======== ======== ======== ========
-26-
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 Interest income from retained securities, including from our undivided
interest in wholesale receivables,
o Servicing fee income from sold receivables that we continue to service,
and
o Excess spread and other income.
The following table summarizes activity related to off-balance sheet sales
of receivables reported in Investment and other income related to sales of
receivables for the periods indicated:
Second Quarter First Half Full-Year
---------------- ---------------- --------------------------------
2004 2003 2004 2003 2003 2002 2001 2000
------- ------- ------- ------ ------- ------ ------ ------
(in millions)
Net gain on sales of receivables............ $ 69 $ 51 $ 130 $ 284 $ 436 $ 529 $ 412 $ 14
Interest income from retained securities.... 166 197 305 407 679 606 379 152
Servicing fees.............................. 111 179 230 376 677 700 456 190
Excess spread and other..................... 235 245 465 496 973 775 186 201
------ ------- ------- ------- ------- ------- ------ -----
Investment and other income related to
sales of receivables..................... 581 672 1,130 1,563 2,765 2,610 1,433 557
Less: Whole-loan income..................... (32) (48) (56) (109) (234) (79) -- --
------ ------- ------- ------- ------- ------- ------ -----
Income related to off-balance sheet
securitizations......................... $ 549 $ 624 $ 1,074 $ 1,454 $ 2,531 $ 2,531 $1,433 $ 557
====== ======= ======= ======= ======= ======= ====== =====
Memo:
Finance receivables sold.................. $ 2,400 $ 2,666 $ 4,852 $13,248 $21,321 $40,712 $52,533 $21,618
Servicing portfolio as of period-end...... 51,304 62,595 51,304 62,595 56,705 76,346 58,748 28,366
Pre-tax gain per dollar of retail
receivables sold......................... 2.9% 1.9% 2.7% 2.1% 2.0% 1.4% 1.2% 0.1%
In the second quarter of 2004, investment and other income related to sales
of receivables declined $91 million or 14% compared with a year ago. This
decline resulted from lower levels of outstanding sold receivables, down about
$11 billion compared with the second quarter of 2003, reflecting primarily our
lower funding requirements. Excluding the effects of whole-loan sale
transactions, which totaled $10.4 billion in the 2002-2004 period, off-balance
sheet securitization income declined $75 million compared with 2003. In the
first half of 2004, off-balance sheet securitization income declined $380
million or 26% compared with the first half of 2003. The decline reflects
primarily lower off-balance sheet retail receivables sales in 2004, and lower
levels of outstanding sold receivables.
The net impact of off-balance sheet securitizations on our earnings in a
given period will vary depending on the amount and type of receivables sold and
the timing of the transactions in the current period and the preceding
two-to-three year period, as well as the interest rate environment at the time
the finance receivables were originated and securitized.
-27-
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:
Second Quarter First Half Full-Year
------------------ ---------------- ---------------------------------------
2004 2003 2004 2003 2003 2002 2001 2000
------- -------- ------ ------- ------- ------ ------ -------
(in millions)
Financing revenue
Retail revenue................. $ 663 $ 951 $ 1,365 $ 2,030 $ 3,580 $ 4,040 $ 2,954 $ 1,622
Wholesale revenue.............. 284 297 551 589 1,080 1,101 499 384
------- ------- -------- ------- ------- ------- ------- -------
Total financing revenue...... 947 1,248 1,916 2,619 4,660 5,141 3,453 2,006
Borrowing cost................... (244) (390) (513) (872) (1,491) (2,205) (1,784) (1,242)
------- ------- -------- ------- ------- ------- ------- -------
Net financing margin......... 703 858 1,403 1,747 3,169 2,936 1,669 764
Credit losses.................... (101) (153) (234) (346) (677) (454) (219) (92)
------- ------- -------- ------- ------- ------- ------- -------
Income before income taxes. $ 602 $ 705 $ 1,169 $ 1,401 $ 2,492 $ 2,482 $ 1,450 $ 672
======= ======= ======== ======= ======= ======= ======= =======
Memo:
Income related to off-balance sheet
securitizations................. $ 549 $ 624 $ 1,074 $ 1,454 $ 2,531 $ 2,531 $ 1,433 $ 557
Recalendarization impact of
off-balance sheet securitizations.. $ (53) $ (81) $ (95) $ 53 $ 39 $ 49 $ (17) $ (115)
In the second quarter of 2004, the impact to earnings of off-balance sheet
securitizations was $53 million lower than had these transactions been
structured as on-balance sheet securitizations. For the first half of 2004, the
impact was $95 million lower than had these transactions been structured as
on-balance sheet securitizations. These differences result from
recalendarization effects caused by gain-on-sale accounting requirements. This
effect will fluctuate as the amount of receivables sold in our off-balance sheet
securitizations increases or decreases over time.
-28-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
Leverage
We use leverage, or the debt-to-equity ratio, to make various business
decisions, including establishing pricing for retail, wholesale and lease
financing, and assessing our capital structure. For a discussion of our capital
structure, see "Capital Adequacy" in our 2003 10-K Report. We calculate leverage
on a financial statement basis and on a managed basis using the following
formulas:
Financial Total Debt
Statement = ----------
Leverage Equity
Retained
Interest
in
Securitized Securitized
Off-balance Off-balance Cash SFAS No. 133
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:
December 31,
June 30, ---------------------------------
2004 2003 2002 2001 2000
-------- ------ ------ ------ -------
(in billions)
Total debt..................................... $ 138.3 $ 149.7 $ 140.3 $ 145.8 $ 145.6
Total stockholder's equity..................... 12.1 12.5 13.6 12.0 12.2
Debt-to-equity ratio (to 1).................... 11.4 12.0 10.3 12.2 11.9
At June 30, 2004, our financial statement leverage was 11.4 to 1, compared
with 12.0 to 1 at year-end 2003. This decrease in leverage resulted primarily
from lower funding requirements.
The following table shows the calculation of our managed leverage:
December 31,
June 30, ---------------------------------
2004 2003 2002 2001 2000
-------- ------ ------ ------ ------
(in billions)
Total debt $ 138.3 $ 149.7 $ 140.3 $ 145.8 $ 145.6
Securitized off-balance sheet receivables
outstanding.................................. 45.8 49.4 71.4 58.7 28.4
Retained interest in securitized off-balance
sheet receivables............................ (16.4) (13.0) (17.6) (12.5) (3.7)
Adjustments for cash and cash equivalents..... (8.8) (15.7) (6.8) (2.9) (1.1)
Adjustments for SFAS No. 133.................. (3.2) (4.7) (6.2) (2.1) --
-------- ------- ------- -------- --------
Total adjusted debt......................... $ 155.7 $ 165.7 $ 181.1 $ 187.0 $ 169.2
======== ======= ======= ======== ========
Total stockholder's equity (including minority
interest) $ 12.1 $ 12.5 $ 13.6 $ 12.0 $ 12.2
Adjustments for SFAS No. 133.................. 0.1 0.2 0.5 0.6 --
-------- ------- ------- -------- -------
Total adjusted equity...................... $ 12.2 $ 12.7 $ 14.1 $ 12.6 $ 12.2
======== ======= ======= ======== ========
Managed debt-to-equity ratio (to 1)........... 12.7 13.0 12.8 14.8 13.9
-29-
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 our 10-K
Report. We believe the managed leverage measure provides our investors with
meaningful information regarding management's decision-making processes.
Our managed leverage strategy involves establishing a leverage level that we
believe reflects the risk characteristics of our underlying assets. In
establishing a target leverage level, we consider the characteristics of the
receivables in our managed portfolio and the prevailing market conditions.
At June 30, 2004, our managed leverage was 12.7 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. Based on our
profitability and managed receivable levels, we paid dividends of $1.9 billion
in the first half of 2004.
Changes in Accounting Standards
The Financial Accounting Standards Board is expected to issue an exposure
draft of an amendment to SFAS No. 140 that: (1) addresses the conditions under
which a qualifying SPE is permitted to issue beneficial interests with
maturities that are shorter than the maturities of the assets held by the
qualifying SPE and roll over those beneficial interests at maturity; (2) amends
other requirements related to commitments by transferors to provide additional
assets to fulfill obligations to the beneficial interest holders; and
(3) addresses other issues related to transfers of financial assets. We are
continuing to assess the impact the expected exposure draft may have on our
accounting for qualifying SPEs and certain securitization funding programs.
Outlook
We expect our earnings in the second half of 2004 to be lower than our
earnings in the first half of 2004 primarily reflecting the impact of lower
receivables, seasonal increases in credit losses and higher interest rates. At
year-end 2004, we expect our managed receivables to be about $170 billion.
-30-
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;
-31-
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 June 30, 2004, all else
constant, such an increase in interest rates would reduce our pre-tax net
interest income by approximately $177 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.
-32-
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Michael E. Bannister, our Chief Executive Officer, and David P. Cosper, our
Vice Chairman, Chief Financial Officer and Treasurer, have performed an
evaluation of the Company's disclosure controls and procedures, as that term is
defined in Rule 13a-14 (c) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as of June 30, 2004 and each has concluded that such
disclosure controls and procedures are effective to ensure that information
required to be disclosed in our periodic reports filed under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
by the Securities and Exchange Commission's rules and regulations.
Changes in Internal Controls
No changes in the Company's internal controls over financial reporting
occurred during the quarter ended June 30, 2004, that have materially affected,
or are reasonably likely to materially affect, the Company's internal controls
over financial reporting.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
As a result of Ford transferring its shares to Ford Holdings, LLC on
July 1, 2004, we are now a wholly owned subsidiary of Ford Holdings, LLC.
Ford Holdings, LLC is a wholly owned subsidiary of Ford.
You can find additional information about Ford in Ford's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2004, which has been included
as an exhibit to this Report (without Exhibits or Financial Statements).
-33-
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits: please refer to Exhibit Index on page 37
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 June 30, 2004:
Current Report on Form 8-K dated April 1, 2004 included information
relating to Ford's March 2004 U.S. sales results.
Current Report on Form 8-K dated April 21, 2004 included information
relating to Ford Credit's and Ford's first quarter 2004 financial
results.
Current Report on Form 8-K dated April 22, 2004 included information
relating to the appointment of officers at Ford Credit and Ford.
Current Report on Form 8-K dated May 3, 2004 included information
relating to Ford's April 2004 U.S. sales results.
Current Report on Form 8-K dated June 2, 2004 included information
relating to Ford's May 2004 U.S. sales results.
Current Report on Form 8-K dated June 16, 2004 included information
relating to Ford's second quarter 2004 earnings guidance.
-34-
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Ford Motor Credit Company has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FORD MOTOR CREDIT COMPANY
By: /s/ David P. Cosper
---------------------------------
(David P. Cosper)
Vice Chairman, Chief Financial Officer and Treasurer
Date: August 6, 2004
-35-
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Ford Motor Credit Company:
We have reviewed the accompanying consolidated balance sheet of Ford Motor
Credit Company and its subsidiaries as of June 30, 2004, and the related
consolidated statements of income for each of the three-month and six month
periods ended June 30, 2004 and 2003, and the consolidated statement of cash
flows from continuing operations for the six-month periods ended June 30, 2004
and 2003. These interim financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
December 31, 2003, and the related consolidated statements of income,
stockholder's equity, and cash flows from continuing operations for the year
then ended (not presented herein), and in our report dated January 21, 2004 we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 2003, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
/s/ PRICEWATERHOUSECOOPERS LLP
Detroit, Michigan
August 5, 2004
-36-
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 August 5, 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
June 30, 2004
-37-