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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-6368
FORD MOTOR CREDIT COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(State of incorporation)
THE AMERICAN ROAD, DEARBORN, MICHIGAN
(Address of principal executive offices)
38-1612444
(I.R.S. employer identification no.)
48121
(Zip code)
Registrant's telephone number, including area code (313) 322-3000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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6 3/8% Notes due November 5, 2008 New York Stock Exchange
8 3/4% Senior Notes due December 1, 2001 The American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
As of February 28, 1997, the registrant had outstanding 250,000 shares of
Common Stock. No voting stock of the registrant is held by non-affiliates of the
registrant.
THE REGISTRANT MEETS THE CONDITION SET FORTH IN GENERAL INSTRUCTION I(1)(A)
AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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PART I
ITEM 1. BUSINESS
The registrant, Ford Motor Credit Company, was incorporated in Delaware in
1959 and is an indirect wholly owned subsidiary of Ford Motor Company (the
"Company" or "Ford"). As used herein "Ford Credit" refers to Ford Motor Credit
Company and its subsidiaries unless the context otherwise requires.
Beginning in late 1995 and continuing through 1996, Ford reorganized its
Financial Services group in order to align more closely legal ownership of the
Financial Services affiliates with management responsibility for such
affiliates. As a result of the reorganization, Ford Credit became a subsidiary
of a newly formed company called Ford FSG, Inc. ("FFSGI"), Ford Credit became
the owner of The American Road Insurance Company ("American Road") and the
majority owner of Ford Credit Europe plc ("Ford Credit Europe") and the majority
of Ford Credit's diversified assets managed by USL Capital Corporation ("USL
Capital") was sold.
Ford Credit and its subsidiaries provide wholesale financing and capital
loans to Ford Motor Company retail dealerships and associated non-Ford
dealerships throughout the world, most of which are privately owned and
financed, and purchase retail installment sale contracts and retail leases from
them. Ford Credit also makes loans to vehicle leasing companies, the majority of
which are affiliated with such dealerships. In addition, subsidiaries of Ford
Credit provide these financing services in the United States, Europe, Canada and
Australia to non-Ford dealerships. A substantial majority of all new vehicles
financed by Ford Credit are manufactured by Ford and its affiliates. Ford Credit
also provides retail financing for used vehicles built by Ford and other
manufacturers. In addition to vehicle financing, Ford Credit makes loans to
affiliates of Ford and finances certain receivables of Ford and its
subsidiaries.
In 1996 and 1995, United States operations, conducted in all 50 states, the
District of Columbia and Puerto Rico, accounted for 79% and 80%, respectively,
of Ford Credit's total revenue; European operations, conducted by Ford Credit
Europe, accounted for 13% of Ford Credit's total revenue in both these periods.
The balance was in Canada, Australia, Japan, Mexico, New Zealand, Indonesia,
Thailand, Taiwan, India and Argentina. In addition, Ford Credit manages the
vehicle financing operations of Ford in other foreign countries which are
conducted through other subsidiaries of Ford.
Outside the United States, Ford Credit Europe is Ford Credit's largest
operation. Ford Credit Europe, which was originally incorporated in 1963 in
England as a private limited company, is owned by Ford Credit (78%) and Ford
Werke AG (22%). In addition, Ford owns Ford Credit Europe's outstanding
preferred stock. Ford Credit Europe's primary business is to support the sale of
Ford vehicles in Europe through the Ford dealer network. A variety of retail,
leasing and wholesale finance plans is provided in most countries in which it
operates. Retail financing is provided by means of a number of title retention
plans, including conditional sale and hire purchase agreements, and personal
loans. Operating and finance leases are provided to individual, corporate and
other institutional customers, covering individual vehicles and large and small
fleets. Wholesale financing is provided to Ford dealers for the stocking of new
and used vehicles. In addition, Ford Credit Europe provides loans to dealers for
working capital and property acquisitions and for a variety of finance plans.
Ford Credit's insurance operations are conducted by American Road and its
subsidiaries in the United States and Canada and consist of extended service
plan contracts for new and used vehicles manufactured by affiliated and
nonaffiliated companies, primarily originating from Ford dealers, physical
damage insurance covering vehicles and equipment financed at wholesale by Ford
Credit, and the reinsurance of credit life and credit disability insurance for
retail purchasers of vehicles and equipment.
The business of Ford Credit is substantially dependent upon Ford Motor
Company. See "Vehicle Financing" and "Borrowings and Other Sources of Funds"
under the caption "Business of Ford Credit". Also see Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations". Any
protracted reduction or suspension of Ford's production or sale of vehicles,
resulting from a decline in demand, a work stoppage, governmental action,
adverse publicity, or other event, could have a substantial adverse effect on
Ford Credit. For additional information concerning Ford's results of operations,
see Ford Motor Company's
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Annual Report on Form 10-K for the year ended December 31, 1996 filed with the
Securities and Exchange Commission.
The mailing address of Ford Credit's executive offices is The American
Road, Dearborn, Michigan 48121. The telephone number of such offices is (313)
322-3000.
SEGMENT INFORMATION
Segment information called for by Item 1 is set forth in Note 15 of Notes
to Financial Statements and is incorporated herein by reference.
BUSINESS OF FORD CREDIT
Ford Credit accounts for its financing business in four categories --
retail (which consists of vehicle installment sale financing and vehicle lease
financing), wholesale, diversified and other. Total net finance receivables and
net investment in operating leases outstanding in these four categories and
geographic regions were as follows at the end of the years indicated:
1996 1995 1994
---- ---- ----
(IN MILLIONS)
Retail
Installment sale/finance lease....................... $ 52,310.6 $ 47,087.0 $ 42,819.0
Operating lease...................................... 30,645.2 25,680.2 20,765.8
Wholesale.............................................. 22,621.9 22,043.8 19,810.0
Diversified............................................ 496.2 2,149.1 2,166.8
Other.................................................. 5,419.3 5,096.8 4,467.1
---------- ---------- ----------
Total............................................. $111,493.2 $102,056.9 $ 90,028.7
========== ========== ==========
United States.......................................... $ 84,782.9 $ 79,126.6 $ 71,618.9
Europe................................................. 18,099.9 16,202.3 13,088.3
Other international.................................... 8,610.4 6,728.0 5,321.5
---------- ---------- ----------
Total............................................. $111,493.2 $102,056.9 $ 90,028.7
========== ========== ==========
VEHICLE FINANCING
Retail. Retail financing consists primarily of installment sale financing
and retail lease financing of new and used vehicles and loans to vehicle leasing
companies, most of which are affiliated with franchised Ford Motor Company
dealerships. The number of installment sale and lease vehicles financed by Ford
Credit was as follows during the years indicated:
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
Installment sale/finance lease.............................. 2,740 2,557 2,432
Operating lease............................................. 1,063 965 852
----- ----- -----
Total retail........................................... 3,803 3,522 3,284
===== ===== =====
United States............................................... 2,674 2,499 2,347
Europe...................................................... 720 723 684
Other international......................................... 409 300 253
----- ----- -----
Total retail........................................... 3,803 3,522 3,284
===== ===== =====
The levels of Ford Credit's retail financing volumes and outstanding
finance receivables and net investment in operating leases are dependent on
several factors, including new and used vehicle sales and leases, Ford Credit's
share of those vehicle sales and leases and the average cost of vehicles
financed. See "Competition in Vehicle Financing". In addition, receivables
levels may vary depending on sales of receivables.
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4
Installment sale and retail lease financing consist principally of
purchasing and servicing installment sale contracts and leases covering the sale
or lease of new and used vehicles by vehicle dealers to retail customers. The
amount paid by Ford Credit to the dealer for an installment sale contract or
lease generally represents a negotiated amount agreed to between the dealer and
the customer, less any trade-in or downpayment. In addition, a portion of the
finance charge or lease charge is paid or credited to the dealer. Ford Credit
requires a retail purchaser or lessee to carry fire, theft and collision
insurance on the vehicle. In addition, retail lessees are required to carry
liability insurance.
Installment sales contract terms range up to 60 months. In the U.S., the
average repayment obligation for new vehicles covered by installment sale
contracts purchased by Ford Credit in 1996 was $20,105. The corresponding
average monthly payment was $394 and the average original term was 53 months.
The monthly lease payment equals the amount paid to the dealer for the
vehicle and lease (the "acquisition cost") less the residual value of the
vehicle established by Ford Credit, amortized over the lease term, plus the
lease charge. The acquisition cost to Ford Credit of the vehicle, less the
residual value, is depreciated on a straight line basis over the life of the
lease. Residual values are determined by Ford Credit after analyzing published
residual values and Ford Credit's own historical experience in the used vehicle
market. In addition, joint marketing programs with Ford's sales divisions can
affect established residual values. At lease termination, Ford Credit either
sells the vehicle to the dealer for the established residual value or sells the
vehicle at auction for the market price.
Retail lease terms range from 12 to 48 months. In the U.S., the average
monthly payment of retail lease contracts purchased by Ford Credit in 1996 was
$388 and the average original term was 27 months.
Ford Credit extends financing to leasing companies and daily rental
companies. Financing charges in connection with such lease financing either are
fixed or floating based on short-term interest rates in effect at the time
financing is extended. These rates may be supplemented by payments from Ford
whenever the rate payable is less than the specified minimum rate agreed between
Ford Credit and Ford.
Wholesale. Wholesale financing consists of loans, under approved lines of
credit, to dealers to assist them in carrying inventories of new and used
vehicles. Ford Credit generally finances 100% of the wholesale price. Vehicles
are insured against fire, theft and other risks under policies issued to Ford
Credit. Ford Credit's United States car and truck wholesale receivables that
liquidated were outstanding an average of about 77 days in both 1996 and 1995.
The levels of Ford Credit's wholesale financing volume and outstanding
wholesale receivables are dependent on several factors, including sales by Ford
to dealers, the level of dealer inventories, Ford Credit's share of Ford's sales
to dealers, vehicle prices and sales of wholesale receivables.
Competition In Vehicle Financing. The vehicle financing business is highly
competitive. Ford Credit's principal competitors are banks, credit unions and
leasing companies.
Ford Credit financed the following percentages of new Ford cars and trucks
sold or leased at retail and sold at wholesale in the United States and Europe
during each of the years indicated:
1996 1995 1994
---- ---- ----
United States
Retail*........................................... 37.8% 36.9% 36.6%
Wholesale......................................... 79.5 79.7 81.5
Europe
Retail*........................................... 29.1 30.2 29.4
Wholesale......................................... 90.8 89.2 88.3
- -------------------------
* As a percentage of total sales and leases, including cash sales
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DIVERSIFIED FINANCING
As a part of Ford's sale of USL Capital's assets during 1996, the majority
of Ford Credit's diversified assets (except leveraged leases) managed by USL
Capital was sold. Ford Credit formed a partnership with Bank of America to
manage a significant portion of the leveraged lease portfolio and certain
leveraged leases were transferred to the partnership. The investment in the
partnership is included in "other assets" on Ford Credit's balance sheet. See
Notes 2 and 7 of Notes to Financial Statements. At December 31, 1996 diversified
finance receivables outstanding represented 0.4% of Ford Credit's total net
finance receivables and net investment in operating leases.
OTHER FINANCING ACTIVITIES
Ford Credit makes capital loans to vehicle dealers for facilities expansion
and working capital and to enable them to purchase dealership real estate. Such
loans totaled $2,248.2 million at December 31, 1996. From time to time, Ford
Credit purchases accounts receivable of certain divisions and affiliates of
Ford. At December 31, 1996, such receivables totaled $4,043.4 million, all of
which represent accounts receivable purchased by Ford Credit from Ford pursuant
to agreements under which Ford Credit may purchase such receivables.
CREDIT LOSS EXPERIENCE
The following table sets forth information concerning Ford Credit's credit
loss experience with respect to the various categories and geographic regions of
financing during the years indicated:
1996 1995 1994
---- ---- ----
(DOLLAR AMOUNTS IN MILLIONS)
Net losses/(recoveries)
Retail*................................................... $803.6 $466.7 $225.7
Wholesale................................................. 18.6 9.9 (9.8)
Diversified............................................... 1.4 4.8 1.8
Other..................................................... 6.4 4.5 5.4
------ ------ ------
Total.................................................. $830.0 $485.9 $223.1
====== ====== ======
United States............................................. $707.0 $371.6 $218.4
Europe.................................................... 95.5 92.0 (5.6)
Other international....................................... 27.5 22.3 10.3
------ ------ ------
Total.................................................. $830.0 $485.9 $223.1
====== ====== ======
- -------------------------
* Includes net losses on operating leases
Net losses as a percent of average net receivables*
Retail................................................... 1.03% 0.68% 0.39%
Total finance receivables................................ 0.78 0.51 0.27
Provision for credit losses................................ $ 993.3 $ 480.4 $ 293.9
Allowance for credit losses................................ 1,217.6 1,054.9 1,084.4
As percent of net receivables*........................... 1.14% 1.10% 1.33%
- -------------------------
* Includes net investment in operating leases
Allowances for estimated credit losses are established as required based on
historical experience. Other factors that affect collectibility also are
evaluated and additional allowances may be provided. The provision for credit
losses generally varies with changes in the amount of loss exposure and the
absolute level of financing. Ford Credit's retail loss experience is dependent
upon the number of repossessions, the unpaid balance outstanding at the time of
repossession, and the net resale value of repossessed vehicles. Wholesale losses
generally reflect the financial condition of dealers. For additional information
regarding credit losses, see
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Notes 1 and 6 of Notes to Financial Statements and see Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
SECURITY
Ford Credit generally either holds security interests in or is the title
owner of the vehicles which it finances or leases and generally is able to
repossess a vehicle in the event of a default. The right to repossess under a
security interest securing wholesale obligations generally is ineffectual, as a
matter of law, against a retail buyer of a vehicle from a dealer. Under the
wholesale installment sale plan, dealers are permitted to delay payment of up to
10% of a vehicle's financed balance for up to 60 days after the dealer sells the
vehicle. A portion of such delayed payments may, under certain circumstances, be
unsecured. Obligations arising from lease financing extended to leasing
companies are collateralized to the extent practicable by assignments of rentals
under the related leases and, in almost all instances, by liens on the vehicles
(which liens are not perfected against third parties in some cases).
BORROWINGS AND OTHER SOURCES OF FUNDS
Ford Credit relies heavily on its ability to raise substantial amounts of
funds. These funds are obtained primarily by the sale of commercial paper, the
issuance of term debt and, in the case of Ford Credit Europe, the issuance of
certificates of deposit. Funds also are provided by retained earnings and sales
of receivables. The level of funds can be affected by certain transactions with
Ford, such as capital contributions, interest supplements and other support
costs from Ford for vehicles financed and leased by Ford Credit under Ford-
sponsored special financing and leasing programs, and dividend payments, and the
timing of payments for the financing of dealers' wholesale inventories and for
income taxes. Ford Credit's ability to obtain funds is affected by its debt
ratings, which are closely related to the outlook for, and financial condition
of, Ford, and the nature and availability of support facilities. The long-term
senior debt of Ford, Ford Credit and Ford Credit Europe are rated "A1" and "A+"
and the commercial paper of Ford Credit and Ford Credit Europe are rated
"Prime-1" and "A-1" by Moody's Investors Service and Standard & Poor's Ratings
Group, respectively. For additional information regarding Ford Credit's
association with Ford, see "Certain Transactions with Ford and Affiliates".
Ford Credit's outstanding debt at the end of each of the last three years
was as follows:
1996 1995 1994
---- ---- ----
(IN MILLIONS)
Commercial paper and STBAs(a)............................... $38,774 $40,419 $38,128
Other short-term debt(b).................................... 4,243 1,781 1,357
Long-term debt (including current portion)(c)............... 55,007 49,980 41,503
------- ------- -------
Total debt................................................ $98,024 $92,180 $80,988
======= ======= =======
United States............................................... $76,635 $73,178 $65,715
Europe...................................................... 14,028 13,013 10,548
Other international......................................... 7,361 5,989 4,725
------- ------- -------
Total debt................................................ $98,024 $92,180 $80,988
======= ======= =======
Memo:
Total support facilities (billions) as of December 31:
Ford Credit............................................ $ 27.2 $ 27.4 $ 22.3
Ford Credit Europe..................................... 5.7 4.7 6.6
- -------------------------
(a) Short-term borrowing agreements with bank trust departments
(b) Includes $2,478 million, $176 million and $25 million with affiliated
companies at December 31, 1996, December 31, 1995 and December 31, 1994,
respectively
(c) Includes $4,237 million, $1,174 million, and $75 million with affiliated
companies at December 31, 1996, December 31, 1995, and December 31, 1994,
respectively
5
7
Outstanding commercial paper totaled $38.2 billion at December 31, 1996,
down $1.9 billion from a year earlier. In 1996, long-term debt placements were
$13.4 billion compared with maturities and early redemptions of $8.3 billion.
Long-term debt placements in 1995 were $15.5 billion. In 1996, Ford Credit also
received $4.7 billion from sales of receivables and operating leases compared
with $5.4 billion in 1995.
Support facilities represent additional sources of funds, if required. At
December 31, 1996, Ford Credit had approximately $19.6 billion of contractually
committed facilities. In addition, $7.6 billion of Ford bank lines may be used
by Ford Credit at Ford's option. The lines have various maturity dates through
June 30, 2001 and may be used, at Ford Credit's option, by any of its direct or
indirect majority-owned subsidiaries. Any such borrowing will be guaranteed by
Ford Credit. Banks also provide $1.6 billion of contractually committed
liquidity facilities to support Ford Credit's asset backed commercial paper
program.
Additionally, at December 31, 1996, there was approximately $4.9 billion of
contractually committed facilities available for Ford Credit Europe's use. In
addition, $775 million of Ford bank lines may be used by Ford Credit Europe at
Ford's option. The lines have various maturity dates through June 30, 2001 and
may be used, at Ford Credit Europe's option, by any of its direct or indirect
majority-owned subsidiaries. Any such borrowing will be guaranteed by Ford
Credit Europe.
DERIVATIVE FINANCIAL INSTRUMENTS
Ford Credit operates in many countries worldwide, and is exposed to market
risks, including the effects of changes in interest rates and changes in foreign
currency exchange rates. Ford Credit issues debt and other payables with various
maturity and interest rate structures to ensure funding over business and
economic cycles and to minimize overall borrowing costs. The maturity and
interest rate structures frequently differ from the invested assets. Exposures
to fluctuations in interest rates are created by the difference in maturities of
liabilities versus the maturities of assets. The financial exposures are
monitored and managed in accordance with Ford Credit's established policies and
procedures.
Ford Credit has entered into agreements to manage exposures to fluctuations
in interest rates and foreign exchange. These agreements are used to hedge
interest rate exposure and to hedge debt denominated in foreign currencies. All
such instruments are classified as "held for purposes other than trading";
company policy specifically prohibits the use of derivatives for speculative
purposes.
FORD CREDIT EMPLOYEE RELATIONS
At December 31, 1996, Ford Credit and its subsidiaries had 14,261
employees. All such employees are salaried, and none is represented by a union.
Ford Credit considers its employee relations to be satisfactory.
FORD CREDIT GOVERNMENTAL REGULATIONS
Various aspects of Ford Credit's U.S. financing operations are regulated in
the various jurisdictions in which it operates. Many jurisdictions require
licenses to conduct retail financing. Interest rates, particularly those with
respect to consumer financing, generally are limited by law and, in periods of
high interest rates, these limitations can have a substantial adverse effect on
operations in certain jurisdictions if Ford Credit is unable to pass on its
increased interest costs to its customers.
During the past several years, legislative, judicial, and administrative
authorities have evidenced a growing concern for the protection of the interest
of consumers, especially in connection with consumer financing transactions. As
a result, significant changes have been made in the methods by which Ford Credit
and the financing industry conduct business, and many proposals have been made
which would require further changes. None of the changes to date has had a
substantial adverse effect on the operations of Ford Credit.
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CERTAIN TRANSACTIONS WITH FORD AND AFFILIATES
For information concerning transactions between Ford Credit and Ford or
affiliates, see Note 12 of Notes to Financial Statements, "Business of Ford
Credit -- Other Financing Activities", "Business of Ford Credit -- Borrowings
and Other Sources of Funds" and Item 6 -- "Selected Financial Data -- Selected
Income Statement Data." The profit maintenance agreement referred to in the
first paragraph of Note 12 of Notes to Financial Statements, under which Ford
has agreed to maintain the income of Ford Credit at certain minimum levels,
expires at the end of 1998. In addition, Ford has agreed to maintain a minimum
ownership interest in Ford Credit Europe and has agreed to maintain or cause
Ford Credit to maintain Ford Credit Europe's net worth at a minimum level.
BUSINESS OF FORD
Ford was incorporated in Delaware in 1919 and acquired the business of a
Michigan company, also known as Ford Motor Company, incorporated in 1903 to
produce automobiles designed and engineered by Henry Ford. Ford is the world's
largest producer of trucks and the second largest producer of cars and trucks
combined. Ford also is one of the largest providers of financial services
worldwide.
GENERAL
The Company's two principal business segments are Automotive and Financial
Services. The activities of the Automotive segment consist of the design,
manufacture, assembly and sale of cars and trucks and related parts and
accessories. Substantially all of Ford's automotive products are marketed
through retail dealerships, most of which are privately owned and financed.
The primary activities of the Financial Services segment consist of
financing operations, vehicle and equipment leasing and rental operations, and
insurance operations. These activities are conducted primarily through the
following subsidiaries: Ford Credit, Associates First Capital Corporation ("The
Associates") and The Hertz Corporation ("Hertz").
AUTOMOTIVE OPERATIONS
The worldwide automotive industry is affected significantly by a number of
factors over which the industry has little control, including general economic
conditions.
In the United States, the automotive industry is a highly-competitive,
cyclical business characterized by a wide variety of product offerings. The
level of industry demand (retail deliveries of cars and trucks) can vary
substantially from year to year. In any year, demand is dependent to a large
extent on general economic conditions, the cost of purchasing and operating cars
and trucks and the availability and cost of credit and of fuel. Industry demand
also reflects the fact that cars and trucks are durable items, the replacement
of which can be postponed.
The automotive industry outside of the United States consists of many
producers, with no single dominant producer. Certain manufacturers, however,
account for the major percentage of total sales within particular countries,
especially their respective countries of origin. Most of the factors that affect
the U.S. automotive industry and its sales volumes and profitability are equally
relevant outside the United States.
The worldwide automotive industry also is affected significantly by a
substantial amount of costly government regulation. In the United States and
Europe, for example, government regulation has arisen primarily out of concern
for the environment, for greater vehicle safety and for improved fuel economy.
Many governments also regulate local content and/or impose import requirements
as a means of creating jobs, protecting domestic producers or influencing their
balance of payments.
Unit sales of Ford vehicles vary with the level of total industry demand
and as a result of Ford's share of industry sales. Ford's share is influenced by
the quality, price, design, driveability, safety, reliability, economy and
utility of its products compared with those offered by other manufacturers, as
well as by the timing of new model introductions and capacity limitations.
Ford's ability to satisfy changing consumer preferences with
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respect to type or size of vehicle and its design and performance
characteristics can affect Ford's sales and earnings significantly.
The profitability of vehicle sales is affected by many factors, including
unit sales volume, the mix of vehicles and options sold, the level of
"incentives" (price discounts) and other marketing costs, the costs for customer
warranty claims and other customer satisfaction actions, the costs for
government-mandated safety, emission and fuel economy technology and equipment,
the ability to control costs and the ability to recover cost increases through
higher prices. Further, because the automotive industry is capital intensive, it
operates with a relatively high percentage of fixed costs which can result in
large changes in earnings with relatively small changes in unit volume.
UNITED STATES
Sales Data. The following table shows U.S. industry demand for the years
indicated:
U.S. INDUSTRY RETAIL DELIVERIES
(MILLIONS OF UNITS)
--------------------------------------------------------
YEARS ENDED DECEMBER 31
--------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Cars.............................. 8.6 8.6 9.0 8.5 8.2
Trucks............................ 6.9 6.5 6.4 5.7 4.9
---- ---- ---- ---- ----
Total........................... 15.5 15.1 15.4 14.2 13.1
==== ==== ==== ==== ====
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Ford classifies cars by small, middle, large and luxury segments and trucks
by compact pickup, compact bus/van/utility, full-size pickup, full-size
bus/van/utility and medium/heavy segments. The large and luxury car segments and
the compact bus/van/utility, full-size pickup and full-size bus/van/utility
truck segments include the industry's most profitable vehicle lines. The term
"bus" as used herein refers to vans designed to carry passengers. The following
tables show the proportion of retail car and truck sales by segment for the
industry (including Japanese and other foreign-based manufacturers) and Ford for
the years indicated:
U.S. INDUSTRY VEHICLE SALES BY SEGMENT
YEARS ENDED DECEMBER 31
-------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Cars
Small.............................. 19.1% 19.6% 20.1% 19.8% 20.4%
Middle............................. 25.6 26.4 26.8 28.8 30.0
Large.............................. 3.9 4.3 4.8 5.0 5.8
Luxury............................. 6.7 6.8 6.6 6.4 6.4
----- ----- ----- ----- -----
Total U.S. Industry Car Sales... 55.3 57.1 58.3 60.0 62.6
----- ----- ----- ----- -----
Trucks
Compact Pickup..................... 6.2 6.8 7.7 7.6 7.8
Compact Bus/Van/Utility............ 19.0 18.0 16.9 16.5 15.0
Full-Size Pickup................... 12.6 11.5 11.0 9.9 9.0
Full-Size Bus/Van/Utility.......... 5.0 4.4 4.1 4.2 4.0
Medium/Heavy....................... 1.9 2.2 2.0 1.8 1.6
----- ----- ----- ----- -----
Total U.S. Industry Truck
Sales......................... 44.7 42.9 41.7 40.0 37.4
----- ----- ----- ----- -----
Total U.S. Industry Vehicle
Sales......................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
FORD VEHICLE SALES BY SEGMENT IN U.S.
YEARS ENDED DECEMBER 31
-------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Cars
Small.............................. 13.4% 15.1% 17.5% 15.1% 14.6%
Middle............................. 22.1 22.3 22.7 26.9 29.4
Large.............................. 5.3 4.9 5.2 5.1 5.8
Luxury............................. 4.1 4.4 4.7 4.9 5.2
----- ----- ----- ----- -----
Total Ford U.S. Car Sales....... 44.9 46.7 50.1 52.0 55.0
----- ----- ----- ----- -----
TRUCKS
Compact Pickup..................... 7.4 8.0 8.9 9.5 7.6
Compact Bus/Van/Utility............ 20.0 20.1 16.7 15.6 15.1
Full-Size Pickup................... 20.0 17.9 16.7 15.6 15.1
Full-Size Bus/Van/Utility.......... 6.6 5.9 6.2 6.0 5.9
Medium/Heavy*...................... 1.1 1.4 1.4 1.3 1.3
----- ----- ----- ----- -----
Total Ford U.S. Truck Sales..... 55.1 53.3 49.9 48.0 45.0
----- ----- ----- ----- -----
Total Ford U.S. Vehicle Sales... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
- -------------------------
* As announced on February 19, 1997, Ford and Freightliner Corporation
("Freightliner") have signed a letter of intent relating to the purchase by
Freightliner of technology, unique tooling and assembly equipment for Ford's
heavy trucks. The potential sale covers the United States, Canadian, Mexican
and Australian markets. The transaction is subject to the signing of
definitive agreements and regulatory approvals.
As shown in the tables above, since 1992 there has been a significant shift
from cars to trucks for both industry sales and Ford sales. Most of the shift
reflects fewer sales of cars in the middle and large segments for the industry
and in the middle, large and luxury segments for Ford and increased sales of
trucks in the compact bus/van/utility (e.g., Windstar and Explorer/Mountaineer),
full-size bus/van/utility (e.g., Expedition) and full-size pickup (e.g.,
F-Series) segments for both the industry and Ford.
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Market Share Data. The following tables show changes in car and truck
market shares of U.S. and foreign-based manufacturers for the years indicated:
U.S. CAR MARKET SHARES*
-----------------------------------------
YEARS ENDED DECEMBER 31
-----------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
U.S. Manufacturers (Including Imports)
Ford................................................... 20.6% 20.9% 21.8% 22.3% 21.8%
General Motors......................................... 32.3 33.9 34.0 34.1 34.6
Chrysler............................................... 9.8 9.1 9.0 9.8 8.3
----- ----- ----- ----- -----
Total U.S. Manufacturers............................ 62.7 63.9 64.8 66.2 64.7
Foreign-Based Manufacturers**
Japanese............................................... 30.0 29.7 29.6 29.1 30.1
All Other.............................................. 7.3 6.4 5.6 4.7 5.2
----- ----- ----- ----- -----
Total Foreign-Based Manufacturers................... 37.3 36.1 35.2 33.8 35.3
----- ----- ----- ----- -----
Total U.S. Car Retail Deliveries.................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
U.S. TRUCK MARKET SHARES*
-----------------------------------------
YEARS ENDED DECEMBER 31
-----------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
U.S. Manufacturers (Including Imports)
Ford................................................... 31.1% 31.9% 30.1% 30.5% 29.7%
General Motors......................................... 29.0 29.9 30.9 31.4 32.2
Chrysler............................................... 23.4 21.3 21.7 21.4 21.1
Navistar International................................. 1.3 1.4 1.3 1.3 1.3
All Other.............................................. 1.8 2.0 1.8 1.6 1.4
----- ----- ----- ----- -----
Total U.S. Manufacturers............................ 86.6 86.5 85.8 86.2 85.7
Foreign-Based Manufacturers**
Japanese............................................... 12.7 12.7 13.5 13.2 13.8
All Other.............................................. 0.7 0.8 0.7 0.6 0.5
----- ----- ----- ----- -----
Total Foreign-Based Manufacturers................... 13.4 13.5 14.2 13.8 14.3
----- ----- ----- ----- -----
Total U.S. Truck Retail Deliveries.................. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
U.S. COMBINED CAR AND TRUCK MARKET SHARES*
----------------------------------------------
YEARS ENDED DECEMBER 31
----------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
U.S. Manufacturers (Including Imports)
Ford................................................... 25.2% 25.6% 25.2% 25.5% 24.7%
General Motors......................................... 30.8 32.2 32.7 33.1 33.7
Chrysler............................................... 15.9 14.3 14.3 14.4 13.1
Navistar International................................. 0.6 0.6 0.5 0.5 0.5
All Other.............................................. 0.7 0.9 0.8 0.7 0.5
----- ----- ----- ----- -----
Total U.S. Manufacturers............................ 73.2 73.6 73.5 74.2 72.5
Foreign-Based Manufacturers**
Japanese............................................... 22.4 22.6 22.9 22.8 24.0
All Other.............................................. 4.4 3.8 3.6 3.0 3.5
----- ----- ----- ----- -----
Total Foreign-Based Manufacturers................... 26.8 26.4 26.5 25.8 27.5
----- ----- ----- ----- -----
Total U.S. Car and Truck Retail Deliveries.......... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
- -------------------------
* All U.S. retail sales data are based on publicly available information from
the American Automobile Manufacturers Association, the media and trade
publications.
** Share data include cars and trucks assembled and sold in the U.S. by
Japanese-based manufacturers selling through their own dealers as well as
vehicles imported by them into the U.S. "All Other" includes primarily
companies based in various European countries and in Korea.
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Japanese Competition. The market share of Ford and other domestic
manufacturers in the United States is affected by sales from Japanese
manufacturers. As shown in the table above, the share of the U.S. combined car
and truck industry held by the Japanese manufacturers decreased from 24% in 1992
to 22.4% in 1996. This trend reflects in part the effects of the strengthening
prior to 1996 of the Japanese yen on the prices of vehicles produced by the
Japanese manufacturers, the overall market shift from cars to trucks and
improvements in the vehicles produced by U.S. manufacturers. Recently, however,
the Japanese yen has weakened against the dollar, which could result in
increased sales of Japanese vehicles in the United States.
In the 1980s and continuing in the 1990s, Japanese manufacturers added
assembly capacity in North America (frequently referred to as "transplants") in
response to a variety of factors, including export restraints, movements in the
exchange rate between the Japanese yen and the U.S. dollar, the significant
growth of Japanese car sales in the United States and international trade
considerations. Ford estimates that production in the United States by Japanese
transplants was approximately 2.3 million units in 1996.
Marketing Incentives and Fleet Sales. As a result of intense competition
from new product offerings (from both domestic and foreign manufacturers) and
the desire to maintain economic production levels, automotive manufacturers that
sell vehicles in the United States have provided marketing incentives (price
discounts) to retail and fleet customers (i.e., daily rental companies,
commercial fleets, leasing companies and governments). Marketing incentives are
particularly prevalent during periods of economic downturns, when excess
capacity in the industry tends to increase.
Ford's marketing costs in the United States as a percentage of gross sales
revenue for each of 1996, 1995, and 1994 were 8.0%, 8.2%, and 7.8%,
respectively. "Marketing costs" include (i) marketing incentives on vehicles
such as retail rebates and costs for special financing rates, (ii) reserves for
residual guaranties on retail vehicle leases, (iii) reserves for costs and/or
losses associated with obligatory repurchases of certain vehicles sold to daily
rental companies and (iv) costs for advertising and sales promotions for
vehicles.
Sales by Ford to fleet customers were as follows for the years indicated:
FORD FLEET SALES
---------------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Units sold.................................... 936,000 971,000 924,000 881,000 882,000
Percent of Ford's total car and truck sales... 24% 25% 24% 25% 28%
Fleet sales generally are less profitable than retail sales, and sales to daily
rental companies generally are less profitable than sales to other fleet
purchasers. The mix between sales to daily rental companies and other fleet
sales has been about evenly split in recent years.
Warranty Coverage. In recent years, due to competitive pressures, vehicle
manufacturers have both expanded the coverage and extended the terms of
warranties on vehicles sold in the United States. Ford presently provides
warranty coverage for defects in factory-supplied materials and workmanship on
all vehicles sold by it in the United States that extends for at least 36 months
or 36,000 miles (whichever occurs first) and covers all components of the
vehicle, other than tires which are warranted by the tire manufacturers.
Different warranty coverage is provided on vehicles sold outside the United
States. In addition, as discussed below under "Governmental Standards -- Mobile
Source Emissions Control", the Federal Clean Air Act requires a useful life of
10 years or 100,000 miles (whichever occurs first) for emissions equipment on
vehicles sold in the United States. As a result of the coverage of these
warranties and the increased concern for customer satisfaction, costs for
warranty repairs, emissions equipment repairs and customer satisfaction actions
("warranty costs") can be substantial. Estimated warranty costs for each vehicle
sold by Ford are accrued at the time of sale. Such accruals, however, are
subject to adjustment from time to time depending on actual experience.
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EUROPE
Europe is the largest market for the sale of Ford cars and trucks outside
the United States. The automotive industry in Europe is intensely competitive;
for the past 12 years, the top six manufacturers have each achieved a car market
share in about the 10% to 17% range. (Manufacturers' shares, however, vary
considerably by country.) This competitive environment is expected to intensify
further as Japanese manufacturers, which together had a European car market
share of 10.8% for 1996, increase their production capacity in Europe and import
restrictions on Japanese built-up vehicles gradually are removed in total by
December 31, 1999. Ford estimates that in 1996 the European automotive industry
had excess capacity of approximately 6 million units (based on a comparison of
European domestic demand and capacity).
In 1996, European car industry sales were 12.6 million units, up 6% from
1995 levels. Truck sales were 1.7 million units, up 6% from 1995 levels. Ford's
European car share for 1996 was 11.6%, down 2/10 of a point from 1995, and its
European truck share for 1996 was 13.1%, down 1.4 points from 1995.
For Ford, Great Britain and Germany are the most important markets within
Europe, although the Southern European countries are becoming increasingly
significant. Any adverse change in the British or German market has a
significant effect on total automotive profits. For 1996 compared with 1995,
total industry sales were up 4% in Great Britain and up 5% in Germany.
OTHER FOREIGN MARKETS
Mexico and Canada. Mexico and Canada also are important markets for Ford.
Generally, industry conditions in Canada closely follow conditions in the U.S.
market. In 1996, industry sales of cars and trucks in Canada were 1.2 million
units, up 3.2% from 1995 levels. Mexico had been a growing market until late
1994. However, substantial devaluation of the Mexican peso in late 1994 created
a high level of uncertainty regarding economic activity in Mexico. In 1996, the
Mexican economy began its recovery and industry volume was 331,000 units, up 42%
from 1995 levels.
South America. Brazil and Argentina are the principal markets for Ford in
South America. The economic environment in those countries has been volatile in
recent years, leading to large variations in profitability. Results also have
been influenced by government actions to reduce inflation and public deficits,
and improve the balance of payments. Industry sales were 1.7 million units in
Brazil in 1996, up 4% from 1995, and 376,000 units in Argentina in 1996, up 15%
from 1995. Prior to 1995, the Company operated in this region through
Autolatina, a joint venture with Volkswagen AG. This joint venture was dissolved
in the fourth quarter of 1995, and Ford is in the process of reestablishing
operations in Brazil and Argentina.
Asia Pacific. In the Asia Pacific region, Australia, Taiwan and Japan are
the principal markets for Ford products with industry volumes in 1996 of
650,000, 471,000 and 7.1 million units, respectively. In 1996, Ford was the
market share leader in Australia with a 20.3% combined car and truck market
share. In Taiwan (where sales of built-up vehicles manufactured in Japan are
prohibited), Ford had the second highest market share with a combined car and
truck market share in 1996 of 17.5%. Ford's principal competition in the Asia
Pacific region has been the Japanese manufacturers. It is anticipated that the
continuing relaxation of import restrictions (including duty reductions) in
Australia and Taiwan will intensify competition in those markets. In May 1996,
Ford increased its ownership interest in Mazda Motor Corporation to 33.4%.
Africa. Ford operates in the South African market through South African
Motor Corporation (Pty.) Limited ("SAMCOR") in which Ford has a 45% equity
interest. SAMCOR is an assembler of Ford and other manufacturers' vehicles in
South Africa. In 1996 industry volume in South Africa was 393,000 units, up 4%
from 1995 levels.
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FINANCIAL SERVICES OPERATIONS
REORGANIZATION
Beginning in late 1995 and continuing through 1996, Ford reorganized its
Financial Services operations in order to align more closely legal ownership of
the Financial Services affiliates with management responsibility for such
affiliates. As a result of the reorganization, Ford Credit and The Associates
became subsidiaries of FFSGI. Also, The Associates completed an initial public
offering of its common stock representing a 19.3% economic interest in The
Associates. In addition, USL Capital completed the sale of substantially all of
its assets, as well as certain assets owned by Ford Credit and managed by USL
Capital.
FORD MOTOR CREDIT COMPANY
For information regarding the businesses of Ford Credit, see "Business of
Ford Credit".
ASSOCIATES FIRST CAPITAL CORPORATION
The Associates is a leading, diversified consumer and commercial finance
organization which provides finance, leasing and related services to individual
consumers and businesses in the United States and internationally. The
Associates' consumer finance operations consist of a variety of specialized
consumer financing products and services including home equity lending, personal
installment lending, retail sales financing and credit cards. The commercial
operations primarily provide retail financing, leasing and wholesale financing
for heavy-duty and medium-duty trucks and truck trailers, construction, material
handling and other industrial equipment and manufactured housing. The Associates
also provides a number of other products and services, including credit-related
and non-credit-related insurance to its consumer and commercial customers as
well as certain fee-based services such as auto fleet leasing and management,
small business administration lending, relocation services and auto club and
roadside assistance services. As mentioned above, in 1996 The Associates
completed an initial public offering of its common stock representing a 19.3%
economic interest in The Associates.
The Associates' net finance receivables were as follows at the dates
indicated (in millions):
DECEMBER 31,
---------------------
1996 1995
---- ----
Consumer finance
Home equity lending.................................... $16,691 $14,316
Personal lending and retail sales finance.............. 7,425 6,225
Credit card............................................ 6,024 4,985
Manufactured housing................................... 1,263 2,049
------- -------
Total consumer finance receivables............. 31,403 27,575
------- -------
Commercial finance
Truck and truck trailer................................ 8,598 7,724
Equipment.............................................. 4,572 3,782
Other.................................................. 1,940 621
------- -------
Total commercial finance receivables........... 15,110 12,127
------- -------
Net finance receivables.................................. $46,513 $39,702
======= =======
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15
The following table sets forth information as of the dates shown regarding
The Associates' net credit losses, allowance for losses and contractual
delinquency.
YEARS ENDED OR AT DECEMBER 31
-------------------------------
1996 1995 1994
---- ---- ----
Net credit losses
Amount (in millions).............................. $ 885 $ 624 $ 509
As a percentage of average net receivables
Consumer....................................... 2.80% 2.35% 2.30%
Commercial..................................... 0.33 0.19 0.09
Total..................................... 2.03% 1.70% 1.64%
Allowance for losses to net finance receivables..... 3.36% 3.20% 3.15%
60+ days contractual delinquency
Amount (in millions).............................. $1,107 $ 755 $ 510
As a percentage of finance receivables
Consumer....................................... 2.77% 2.19% 1.80%
Commercial..................................... 1.05 0.64 0.28
Total 2.20% 1.71% 1.35%
An analysis of The Associates' allowance for losses on finance receivables
is as follows for the years indicated (in millions):
1996 1995 1994
---- ---- ----
Beginning balance.................................... $ 1,269 $1,062 $ 893
Additions.......................................... 1,087 834 647
Recoveries...................................... 147 133 118
Losses.......................................... (1,033) (757) (627)
Other adjustments, primarily reserves of acquired
businesses...................................... 93 (3) 31
------- ------ ------
Ending balance....................................... $ 1,563 $1,269 $1,062
======= ====== ======
THE HERTZ CORPORATION
Hertz and its affiliates and independent licensees operate what Hertz
believes is the largest car rental business in the world based upon revenues and
volume of rental transactions and the largest industrial and construction
equipment rental business in the United States based upon revenues. Hertz,
together with its affiliates and independent licensees, rents and leases cars,
rents industrial and construction equipment and operates its other businesses
from approximately 5,500 locations throughout the United States and in
approximately 140 foreign countries and jurisdictions.
In January 1997, Ford announced that it was reviewing strategic options
regarding Hertz, including a partial sale. Consistent with this announcement, on
February 28, 1997, Hertz filed a registration statement with the Securities and
Exchange Commission relating to a proposed public offering of less than 20% of
Hertz' common stock.
GOVERNMENTAL STANDARDS
A number of governmental standards and regulations relating to safety,
corporate average fuel economy ("CAFE"), emissions control, noise control,
damageability and theft prevention are applicable to new motor vehicles,
engines, and equipment manufactured for sale in the United States, Europe and
elsewhere. In addition, manufacturing and assembly facilities in the United
States, Europe and elsewhere are subject to stringent standards regulating air
emissions, water discharges and the handling and disposal of hazardous
14
16
substances. Such facilities in the United States also are subject to a
comprehensive federal-state permit program relating to air emissions.
Mobile Source Emissions Control -- U.S. Requirements. The Federal Clean Air
Act (the "Clean Air Act" or the "Act") imposes stringent limits on the amount of
regulated pollutants that lawfully may be emitted by new motor vehicles and
engines produced for sale in the United States. Concurrently, each passenger car
sold in the United States must comply with these standards for 10 years or
100,000 miles, whichever first occurs. More stringent emissions standards will
become effective as early as the 2004 model year, unless the U.S. Environmental
Protection Agency (the "EPA") decides otherwise. In October 1996, the EPA issued
regulations that changed the test procedures for measuring motor vehicle
emissions. If adequate fuel economy adjustment factors are not proposed and
adopted, these regulations may require costly measures to increase fuel economy.
The Act also requires production of new vehicles capable of operating on
clean alternative fuels under a pilot test program begun in California in 1996.
Under this pilot program, each manufacturer is required to sell a certain number
of alternative fuel vehicles each model year. Since California's reformulated
(i.e., cleaner burning) gasoline is an alternative fuel under the Act, most
manufacturers have complied with this requirement by selling vehicles certified
to California standards.
Pursuant to the Act, California has received a waiver from the EPA to
establish unique emissions control standards. New vehicles and engines sold in
California must be certified by the California Air Resources Board (the "CARB").
The CARB's emissions requirements (the "California program") for model years
1994 through 2003 require manufacturers to meet a non-methane organic gasses
fleet average requirement and are significantly more stringent than those
prescribed by the Act for the corresponding periods of time. California
initially required that a specified percentage of each manufacturer's vehicles
produced for sale in California, beginning at 2% in 1998 and increasing to 10%
in 2003, must be zero-emission vehicles ("ZEVs"), which produce no emissions of
regulated pollutants. In March 1996, however, the CARB eliminated the ZEV
mandate until the 2003 model year. Around the same time, vehicle manufacturers
voluntarily entered into an agreement with CARB to provide air quality benefits
for California equivalent to a 49 state program (i.e., equivalent to providing
vehicles certified to the California low emission vehicle standard nationwide
beginning with the 2001 model year), to continue research and development of ZEV
technology and to provide specific numbers of advanced technology battery
vehicles through demonstration programs in California.
Electric vehicles are the only presently known type of zero-emission
vehicles. However, despite intensive research activities, technologies have not
been identified that would allow manufacturers to produce an electric vehicle
that either meets most customers' expectations or is commercially viable.
Compliance with the ZEV mandate may require manufacturers to curtail the sale of
nonelectric vehicles or to offer substantial discounts on electric vehicles,
selling them well below cost, while increasing the price on nonelectric
vehicles. The California program and ZEV mandates present significant
technological challenges to manufacturers and compliance may require costly
actions that would have a substantial adverse effect on Ford's sales volume and
profits.
The Act also permits other states which do not meet national ambient air
quality standards to adopt the California program no later than two years before
the affected model year. Under the Act, twelve northeastern states and the
District of Columbia form a group known as the Ozone Transport Commission (the
"OTC"). Based on an OTC recommendation, the EPA required each OTC jurisdiction
to adopt the California program. The OTC jurisdictions also may adopt
California's ZEV mandates, if any, but were not required to do so by the EPA. On
March 11, 1997, the Circuit Court of Appeals for the District of Columbia
vacated the EPA's rule requiring the OTC jurisdictions to adopt the California
program. That decision did not affect California programs, including ZEV
mandates, already adopted by individual states. There are major problems with
transferring California standards to the Northeast -- many dealers sell vehicles
in neighboring states and the driving range of present ZEVs is greatly
diminished (by more than 50 percent) in cold weather. Also, the Northeast states
have refused to adopt the California reformulated gasoline requirement, which
makes the task of meeting standards even more difficult. The California program
has been adopted in New York and Massachusetts and is currently in effect for
model years 1996 and beyond. In addition, these two states have
15
17
adopted ZEV mandates beginning in model year 1998. Connecticut has adopted the
California program beginning in model year 1998. Rhode Island and Vermont have
adopted the California program beginning in model year 1999 (with a ZEV mandate
to be required in Vermont after certain determinations with respect to the
advancement of ZEV technology have been made). Maine, Maryland and New Jersey
have laws requiring adoption of the California program and ZEV mandates after
certain conditions, relating to actions which may be taken by other OTC
jurisdictions, have been triggered.
Under the Act, the EPA and CARB can require manufacturers to recall and
repair non-conforming vehicles. The EPA, through its testing of production
vehicles, can also halt the shipment of non-conforming vehicles. Ford may be
required to recall, or may voluntarily recall, vehicles for such purposes in the
future. The costs of related repairs or inspections associated with such recalls
can be substantial.
The Act generally prohibits the introduction of new fuel additives unless a
waiver is granted by the EPA. In 1995, the EPA was ordered by a federal court to
grant such a waiver to Ethyl Corporation for the additive MMT. Ford and other
manufacturers believe that the use of MMT will impair the performance of current
emissions systems and onboard diagnostics systems. Widespread use of MMT could
increase Ford's future warranty costs and necessitate changes in the Company's
warranties for emission control devices.
European Requirements. European Union directives and related legislation
limit the amount of regulated pollutants that may be emitted by new motor
vehicles and engines sold in the European Union. European standards are
generally less stringent than comparable U.S. standards. In June 1996, the
European Commission published a draft proposal for new more stringent European
emissions standards for 2000 (the "Stage III Directive"). That draft includes a
new framework for emission-related fiscal incentives for the early introduction
of vehicles capable of meeting Stage III standards before 2000 and vehicles
capable of meeting newly proposed and even more stringent standards before 2005.
The draft directive provides that prior to December 31, 1998 a technical
feasibility and cost-effectiveness study will be conducted to review appropriate
mandatory standards for 2005.
Certain European countries are conducting in-use emissions testing to
ascertain compliance of motor vehicles with applicable emissions standards.
These actions could lead to recalls of vehicles; the future costs of related
inspection or repairs could be substantial.
Motor Vehicle Safety -- The National Traffic and Motor Vehicle Safety Act
of 1966 (the "Safety Act") prohibits the sale in the United States of any new
motor vehicle or item of motor vehicle equipment that does not conform to motor
vehicle safety standards established by the National Highway Traffic Safety
Administration (the "Safety Administration"). Compliance with many safety
standards is costly because they tend to conflict with the need to reduce
vehicle weight in order to meet emissions and fuel economy standards. The Safety
Administration can order recalls of vehicles and equipment that it finds do not
conform to safety standards. A manufacturer is also obligated to recall its
vehicles if it determines that they contain a safety defect. There currently are
pending before the Safety Administration a number of investigations relating to
alleged safety defects or noncompliance with safety standards in vehicles built,
imported or sold by Ford. The cost of recall programs to remedy safety defects
or noncompliance, should any be determined to exist as a result of such
investigations, could be substantial.
Recently, the Safety Administration adopted a final rule that permits
vehicle manufacturers to reduce the inflation power in air bags in future
models. This final rule will allow Ford and other manufacturers to utilize
designs intended to reduce the risk of air bag deployment related injuries. The
Safety Administration is also considering proposals relating to air bag
deactivation and so called "smart air bags", including air bags that
automatically adjust their inflation to the size or position of the occupant.
Canada, the European Union, individual member countries within the European
Union and other countries in Europe, South America and the Asia Pacific markets
also have safety standards applicable to motor vehicles and are likely to adopt
additional or more stringent standards in the future.
Motor Vehicle Fuel Economy -- U.S. Requirements. Under the Motor Vehicle
Information and Cost Savings Act (the "Cost Savings Act") vehicles must meet
minimum CAFE standards set by the Safety Administration. A manufacturer is
subject to potentially substantial civil penalties if it fails to meet the CAFE
16
18
standard in any model year, after taking into account all available credits for
the preceding three model years and expected credits for the three succeeding
model years.
The Cost Savings Act established a passenger car CAFE standard of 27.5 mpg
for the 1985 and later model years, which the Safety Administration believes it
has the authority to amend to a level it determines to be the maximum feasible
level. The Safety Administration has established a 20.7 mpg CAFE standard
applicable to light trucks for model years 1996 through 1998.
Ford expects to be able to comply with the foregoing CAFE standards, in
some cases using credits from prior or succeeding years. However, an increase in
demand for larger vehicles and a decline in demand for small and middle-size
vehicles could jeopardize its ability to comply.
It is anticipated that efforts may be made to raise the CAFE standard
because of concerns for carbon dioxide ("CO2") emissions, energy security or
other reasons. President Clinton's Climate Change Action Plan ("CCAP") sets a
goal to improve new vehicle fuel efficiency in an amount equivalent to at least
2% per year over a 10 to 15 year period. In addition, international concerns
over global warming due to the emission of "greenhouse gasses" have given rise
to strong pressures to increase fuel economy. During a July 1996 meeting of the
parties to the United Nations Climate Change Convention, the United States
indicated its conceptual support for amending the agreement among the parties to
incorporate binding emission reduction levels. If the CCAP goals are partially
or fully implemented through increases in the CAFE standard, or if significant
increases in car or light truck CAFE standards for subsequent model years
otherwise are imposed, Ford would find it necessary to take various costly
actions that would have substantial adverse effects on its sales volume and
profits. For example, Ford might have to curtail or eliminate production of
larger family-size and luxury cars and full-size light trucks, restrict
offerings of engines and popular options, and continue or increase market
support programs for its most fuel-efficient cars and light trucks.
Foreign Requirements. In June 1996, the European Union Council of
Environmental Ministers affirmed as a medium-term objective an average of
CO2-emission value for new cars of 120 grams per kilometer. Recognizing that
this may not be achievable by 2005, the Council directed the European Commission
to consider intermediate objectives for 2005 and extension of the 120 grams per
kilometers target until 2010. The European Parliament has requested the
Commission to consider proposals to reduce the average CO2 emissions of new cars
to 90 grams per kilometer by 2005. If adopted, certain of the proposals being
considered could require costly actions that could have substantial adverse
effects on Ford's sales volumes and profits in Europe.
In March 1995, members of the German Automobile Manufacturers Association
(including Ford Werke AG) made a voluntary pledge to reduce by 2005 the average
fuel consumption of new cars sold in Germany by 25% from 1990 levels, to review
before the year 2000 the need for and feasibility of further reductions in
average fuel consumption, to make regular reports on fuel consumption, and to
increase industry research and development efforts toward this end.
Other initiatives for reducing CO2 emissions from motor vehicles are being
considered by other European countries. Taken together such proposals could have
substantial adverse effects on Ford's sales volumes and profits in Europe.
Japan has adopted automobile fuel consumption goals that manufacturers must
attempt to achieve by the 2000 model year. The consumption levels apply only to
gasoline-powered vehicles, vary by vehicle weight, and range from 5.8 km/l to
19.2 km/l.
U.S. Stationary Source Air Pollution Control -- The Clean Air Act limits
various emissions into the atmosphere from stationary sources as well as mobile
sources, and allows states to adopt even more stringent standards. The Act
imposes comprehensive permit requirements for manufacturing facilities in
addition to those required by various states. Regulations continue to be
promulgated under the Act, and the costs to comply with the Act could be
substantial. In addition, the enormous complexity and time-consuming nature of
the comprehensive permit program provided for by the Act may reduce operational
flexibility and may interfere with future competitive upgrading of Ford's U.S.
production facilities.
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19
U.S. Water Pollution Control -- Pursuant to the Federal Water Pollution
Control Act (the "Clean Water Act"), Ford is required to obtain permits for its
manufacturing facilities that regulate the facilities' discharge of wastewater
into public waters and municipal sewerage systems. The EPA also requires
management standards and, in some cases, permits for the discharge of storm
water. The standards under the Clean Water Act are established by the EPA and by
the state where a facility is located. Many states have requirements that go
beyond those established under the Clean Water Act.
The EPA also adopted regulations, pursuant to the Great Lakes Critical
Programs Act of 1990, that require more restrictive standards for discharges
into waters that impact the Great Lakes. These regulations may require the
addition of costly control equipment.
U.S. Hazardous Substance and Waste Control -- Pursuant to the Federal
Resource Conservation and Recovery Act ("RCRA"), the EPA has issued regulations
establishing certain procedures and standards for persons who generate,
transport, treat, store, or dispose of hazardous wastes and requiring corrective
action for prior releases. States may adopt even more extensive requirements.
The Federal Comprehensive Environmental Response, Compensation, and Liability
Act ("CERCLA") requires notification regarding certain releases into the
environment, and creates potential liability for remediation costs for and
damage to natural resources at sites where Ford waste was taken for treatment or
disposal. A number of states have enacted separate laws of this type. In
addition, under the Federal Toxic Substances Control Act ("TSCA"), the EPA
evaluates environmental and health effects of existing chemicals and new
substances. Pursuant to TSCA, the EPA regulates the use of polychlorinated
biphenyls in transformers, capacitors and other equipment that may be located at
Ford's U.S. facilities.
European Stationary Source Environmental Control -- The European Union and
individual member countries impose requirements on waste and hazardous wastes,
incineration, packaging, landfill, soil pollution, integrated pollution control,
air emissions standards, import/export and use of dangerous substances, air and
water quality standards, noise, environmental management systems, energy
efficiency, emissions reporting, and planning and permitting. Additional or more
stringent requirements (including tax measures and civil liability schemes for
cleaning polluted sites) are likely to be adopted in the future. The cost of
complying with these standards could be substantial.
The European Commission is currently studying proposals to introduce an
obligation for motor vehicle manufacturers to take back end-of-life vehicles on
a cost-free basis, to impose requirements on the proportion of the vehicle that
may be disposed of in landfills and the proportion that must be reused or
recycled, and to ban the use of certain substances in vehicles. Such proposals
could, if adopted, impose a substantial cost on manufacturers. The German
Automobile Association (including Ford Werke AG) and the German Automobile
Importers Association have made a voluntary pledge to establish a nationwide
infrastructure network to take back passenger cars that are at least 12 years
old (and meet certain other requirements) on a cost-free basis to their owners.
Pollution Control Costs -- During the period 1997 through 2001, Ford
expects that approximately $700 million will be spent on its North American and
European facilities to comply with air and water pollution and hazardous waste
control standards which now are in effect or are scheduled to come into effect.
Of this total, Ford estimates that approximately $100 million will be spent in
1997 and $85 million will be spent in 1998.
Worldwide Regulatory Compatibility -- Ford's efforts to develop new markets
and increase imports are impeded by incompatible automotive safety,
environmental and other product regulatory standards. At present, differing
standards either restrict the vehicles Ford can export to serve new markets or
increase the cost and complexity to do so.
LEGAL PROCEEDINGS
Various legal actions, governmental investigations and proceedings and
claims are pending or may be instituted or asserted in the future against the
Company and its subsidiaries, including those arising out of alleged defects in
the Company's products; governmental regulations relating to safety, emissions
and fuel economy; financial services; employment-related matters; intellectual
property rights; product warranties; and
18
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environmental matters. Certain of the pending legal actions are, or purport to
be, class actions. Some of the foregoing matters involve or may involve
compensatory, punitive or antitrust or other treble damage claims in very large
amounts, or demands for recall campaigns, environmental remediation programs,
sanctions or other relief which, if granted, would require very large
expenditures. Included among the foregoing matters are the following:
Product Liability Matters -- Ford is a defendant in various actions for
damages arising out of automobile accidents where plaintiffs claim that the
injuries resulted from (or were aggravated by) alleged defects in the occupant
restraint systems in vehicle lines of various model years. The damages specified
by the plaintiffs in these actions, including both actual and punitive damages,
aggregated approximately $797 million at December 31, 1996.
Ford is a defendant in various actions involving the alleged propensity of
Bronco II utility vehicles to roll over. The damages specified in these actions,
including both actual and punitive damages, aggregated approximately $1.2
billion at December 31, 1996.
In most of the actions described in the foregoing paragraphs no dollar
amount of damages is specified or the specific amount referred to is only the
jurisdictional minimum. It has been Ford's experience that in cases that allege
a specific amount of damages in excess of the jurisdictional minimum, such
amounts, on average, bear little relation to the actual amounts of damages paid
by Ford in such cases, which generally are, on average, substantially less than
the amounts originally claimed. In addition to the pending actions, accidents
have occurred and claims have arisen which also may result in lawsuits in which
such a defect may be alleged.
Ford is a defendant in various actions for injuries claimed to have
resulted from alleged contact with certain Ford parts and other products
containing asbestos. Damages specified by plaintiffs in complaints in these
actions, including both actual and punitive damages, aggregated approximately
$393 million at December 31, 1996. (In some of these actions no dollar amount of
damages is specified or the specific amount referred to is only the
jurisdictional minimum.) As distinguished from most lawsuits against Ford, in
most of these asbestos-related cases, Ford is but one of many defendants, and
many of these co-defendants have substantial resources.
Environmental Matters -- Ford has received notices from government
environmental enforcement agencies concerning two matters which potentially
involve monetary sanctions exceeding $100,000. The agencies believe that Ford
facilities may have violated regulations relating to the management of certain
materials or relating to certain emissions from facility operations.
Ford has received notices under RCRA, CERCLA and applicable state laws that
it (along with others) may be a potentially responsible party for the costs
associated with remediating numerous hazardous substance storage, recycling or
disposal sites in many states and, in some instances, for natural resource
damages. Ford also may have been a generator of hazardous substances at a number
of other sites. The amount of any such costs or damages for which Ford may be
held responsible could be substantial. Contingent losses expected to be incurred
by Ford in connection with many of these sites have been accrued and are
reflected in Ford's financial statements in accordance with generally accepted
accounting principles. However, for many sites the remediation costs and other
damages for which Ford ultimately may be responsible are not reasonably
estimable because of uncertainties with respect to factors such as Ford's
connection to the site or to materials there, the involvement of other
potentially responsible parties, the application of laws and other standards or
regulations, site conditions, and the nature and scope of investigations,
studies and remediation to be undertaken (including the technologies to be
required and the extent, duration and success of remediation). As a result, Ford
is unable to determine or reasonably estimate the amount of costs or other
damages for which it is potentially responsible in connection with these sites,
although it could be substantial.
Other Matters -- A number of claims have been made or may be asserted in
the future against Ford alleging infringement of patents held by others. Ford
believes that it has valid defenses with respect to the claims that have been
asserted. If some of such claims should lead to litigation, however, and if the
claimant were to prevail, Ford could be required to pay substantial damages.
19
21
In 1992, Ford was sued in federal court in Nevada by an individual patent
owner (Lemelson) seeking damages and an injunction for alleged infringement of
four U.S. patents characterized by Lemelson as covering machine vision
inspection technologies, including bar code reading. Ford filed a declaratory
judgment action in the same court to have these four patents as well as others
of Lemelson's patents directed to machine vision and laser uses declared
invalid, unenforceable and not infringed. Lemelson filed a counterclaim alleging
infringement of the patents added by Ford and several additional patents. In
April 1996, the district court judge issued an order adopting the magistrate
judge's recommendation and granting Ford's motion to dismiss the case and hold
that Lemelson's patents pertaining to machine vision inspection technology are
unenforceable. The patents were held unenforceable because Lemelson engaged in
"undue delay" by taking 35 years or more to prosecute the numerous patent
applications for these patents and claimed the work of others as he saw the
technologies develop. The judge indicated that he will issue a separate opinion
supporting the order and issue a judgment in due course. In June 1996, Lemelson
filed two motions for reconsideration of the district court's order and oral
arguments were heard on February 27, 1997. If Lemelson were to prevail, Ford
could be required to pay substantial damages of an as yet indeterminate amount
and could become subject to an injunction preventing future use of any process
or product found to be covered by a valid patent.
Currently, there are six purported class action lawsuits pending against
the Company that allege defects in the paint processes used with respect to
certain vehicles manufactured by Ford. Four lawsuits are nationwide in scope,
three of which have been consolidated for pretrial proceedings in the U.S.
District Court for the Eastern District of Louisiana and one of which was filed
in federal court in Mississippi. A fifth case recently filed in Kansas federal
court is a statewide action. The Company is seeking to have the Mississippi and
Kansas cases consolidated with the other three in Louisiana. The sixth lawsuit
is pending in Texas state court and is limited to Texas purchasers of the
subject vehicles. In each pending lawsuit, the plaintiffs seek unspecified
compensatory damages, as well as punitive damages, attorneys' fees and costs.
The lawsuits appear to focus on vehicles painted with a high-build electrocoat
primer, with two of the federal court cases alleging defects with respect to
unspecified water-based primers. The vehicles in the high-build electrocoat
category are: 1984 through 1993 F-Series/Broncos, 1984 through 1989 Mustangs,
1984 through 1992 Rangers, 1984 through 1989 Bronco II's and 1984 through 1994
heavy trucks. The vehicles in the water-based primer category are unspecified
1984 through 1996 model year vehicles. In July 1996, the federal court dismissed
virtually all claims in the two cases then consolidated before it, but with
leave to amend certain claims. The plaintiffs have since amended their
complaints and Ford has filed motions to dismiss these cases. In January 1997,
the court in the Texas case granted a portion of the Company's motion for
summary judgment but certified two classes of plaintiffs for trial. Ford is
appealing the class certification order. Were plaintiffs to prevail in these
lawsuits, Ford could be required to pay substantial damages.
Nine purported class action lawsuits seeking economic damages (including
damages for diminution in value and rescission of purchase agreements) have been
brought on behalf of all Bronco II owners in the United States and are currently
pending against Ford. Each lawsuit expressly excludes personal injury claimants,
whose claims are discussed above. Several of the lawsuits seek recovery of
unspecified punitive damages. In addition, several of the lawsuits seek an order
requiring the Company to recall and retrofit these vehicles. The Federal
Judicial Panel on Multidistrict Litigation consolidated seven of these cases for
pretrial purposes in federal court in Louisiana. The other two cases remain
pending in state courts in Alabama and Texas. A tentative settlement was reached
in these matters in 1994, but was rejected by the Louisiana federal court. In
late 1996, the parties submitted a revised settlement proposal, but the
Louisiana federal court rejected that proposal in February 1997. In March 1997,
the court denied plaintiffs' motion for certification of a 49-state class,
ruling that only individualized adjudications of the merits of plaintiffs'
claims would provide a fair and efficient resolution of these matters. While the
court has denied class certification, the seven lawsuits are still pending
before it. Ford has filed summary judgment motions in these cases and plans to
file similar motions in the Alabama and Texas lawsuits.
Currently pending are thirteen purported nationwide class action lawsuits
and one purported statewide class action lawsuit covering purchasers of numerous
Ford vehicle lines, ranging in model years from 1983 to 1993, that are equipped
with an allegedly defective ignition switch. Plaintiffs claim that the ignition
switch in these vehicles has a design defect that can cause the switch to short
circuit, resulting in smoke and fire damage
20
22
to the vehicle. In two of the class actions, plaintiffs purport to represent a
class of owners who have allegedly experienced a related fire incident.
Plaintiffs seek unspecified compensatory damages, punitive damages, attorneys'
fees, and costs, as well as injunctive relief requiring, among other things,
that Ford replace the allegedly defective ignition switch in all affected
vehicles. Thirteen of the lawsuits have been consolidated for initial pretrial
proceedings (including a class certification determination) in federal court in
New Jersey. The remaining lawsuit was pending in state court in Texas but has
been removed and conditionally transferred to the federal court in New Jersey.
If the plaintiffs in the purported class actions were to prevail, Ford could be
required to pay substantial damages.
In 1995, Ford voluntarily recalled 248,000 vehicles in Canada equipped with
the allegedly defective ignition switch. In addition, in 1996, Ford recalled an
additional 8.5 million vehicles in the U.S. and Canada. Investigations
concerning the ignition switch being conducted by the Safety Administration and
Transport Canada were closed in 1996 because the agencies were satisfied that
the prior recalls were adequate to reduce the risk of fire in the population of
vehicles using the same or similar ignition switch. The Safety Administration
and Transport Canada continue to monitor this issue.
In 1996, six purported class action lawsuits were brought on behalf of
purchasers or lessees of Ford-manufactured vehicles with distributor-mounted
thick film ignition (TFI) modules. The plaintiffs allege that vehicles with the
distributor-mounted TFI modules are defective due to a propensity to stumble,
stall or not start. The cases are currently pending in state courts in Alabama,
California, Illinois, Maryland, Tennessee and Washington. The cases pending in
Alabama and Tennessee courts have been conditionally certified as nationwide
class actions. The lawsuit in California purports to represent a state-wide
class, and the remaining three cases purport to be regional class actions. The
parties have agreed to stay proceedings in all but the California action through
the hearing on plaintiffs' motion for class certification and completion of
discovery in the California case. The plaintiffs seek pre- and post-judgment
interest, attorney fees, disgorgement of profits, compensatory damages, punitive
damages, notice to the public and the recall and retrofit of all vehicles with
the allegedly defective TFI modules. If the plaintiffs were to prevail in these
lawsuits, Ford could be required to pay substantial damages.
The Federal Trade Commission and the Department of Justice are continuing
their investigation, commenced in 1995, of the retail vehicle financing credit
practices of Ford Credit for compliance with the Equal Credit Opportunity Act
and Regulation B.
EMPLOYEE RELATIONS
Substantially all hourly employees of Ford in the United States are
included in collective bargaining units represented by unions. Approximately 99%
of these unionized hourly employees are represented by the United Automobile
Workers (the "UAW"). Approximately 3% of salaried employees are represented by
unions. Most hourly employees and many nonmanagement salaried employees of
subsidiaries outside the United States also are represented by unions.
Affiliates of Ford also are parties to collective bargaining agreements in
Britain, France, Germany and Spain. Collective bargaining agreements between
Ford and the UAW and between Ford of Canada and the Canadian Automobile Workers
were entered into in 1996 and are scheduled to expire in September 1999. Ford
has not experienced work stoppages at its facilities in recent years, but work
stoppages have occurred in supplier facilities. Any protracted work stoppages in
the future, whether at Ford's facilities or those of certain suppliers, could
substantially adversely affect Ford's results of operations.
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23
SELECTED FINANCIAL DATA AND OTHER DATA OF FORD MOTOR COMPANY
The following tables set forth selected financial data and other data
concerning Ford for each of the last eleven years (dollar amounts in millions
except per share amounts):
SUMMARY OF OPERATIONS 1996 1995 1994 1993 1992 1991 1990 1989
- --------------------- ---- ---- ---- ---- ---- ---- ---- ----
AUTOMOTIVE
Sales............................... $118,023 $110,496 $107,137 $ 91,568 $ 84,407 $ 72,051 $ 81,844 $ 82,879
Operating income/(loss)............. 2,516 3,281 5,826 1,432 (1,775) (3,769) 316 4,252
Income/(loss) before income taxes
and cumulative effects of changes
in accounting principles.......... 2,571 3,166 5,997 1,291 (1,952) (4,052) 275 5,156
Income/(loss) before cumulative
effects of changes in accounting
principles(a)(c).................. 1,655 2,056 3,913 1,008 (1,534) (3,186) 99 3,175
-------- -------- -------- -------- -------- -------- -------- --------
Net income/(loss)................... 1,655 2,056 3,913 1,008 (8,628) (3,186) 99 3,175
-------- -------- -------- -------- -------- -------- -------- --------
FINANCIAL SERVICES
Revenues............................ $ 28,968 $ 26,641 $ 21,302 $ 16,953 $ 15,725 $ 16,235 $ 15,806 $ 13,267
Income before income taxes and
cumulative effects of changes in
accounting principles............. 4,222 3,539 2,792 2,712 1,825 1,465 1,220 874
Income before cumulative effects of
changes in accounting principles
(b)(d)............................ 2,791 2,083 1,395 1,521 1,032 928 761 660
-------- -------- -------- -------- -------- -------- -------- --------
Net income.......................... 2,791 2,083 1,395 1,521 1,243 928 761 660
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL COMPANY
Income/(loss) before income taxes
and cumulative effects of changes
in accounting principles.......... $ 6,793 $ 6,705 $ 8,789 $ 4,003 $ (127) $ (2,587) $ 1,495 $ 6,030
Provision/(credit) for income
taxes............................. 2,166 2,379 3,329 1,350 295 (395) 530 2,113
Minority interests in net income of
subsidiaries...................... 181 187 152 124 80 66 105 82
-------- -------- -------- -------- -------- -------- -------- --------
Income/(loss) before cumulative
effects of changes in accounting
principles(a)(b)(c)(d)............ 4,446 4,139 5,308 2,529 (502) (2,258) 860 3,835
Cumulative effects of changes in
accounting principles............. -- -- -- -- (6,883) -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income/(loss)................... $ 4,446 $ 4,139 $ 5,308 $ 2,529 $ (7,385) $ (2,258) $ 860 $ 3,835
======== ======== ======== ======== ======== ======== ======== ========
TOTAL COMPANY DATA PER SHARE OF
COMMON AND CLASS B STOCK(E)
Income/(loss) before cumulative
effects of changes in accounting
principles........................ $ 3.72 $ 3.58 $ 4.97 $ 2.27 $ (0.73) $ (2.40) $ 0.93 $ 4.11
Income/(loss)
Assuming no dilution.............. 3.72 3.58 4.97 2.27 (7.81) (2.40) 0.93 4.11
Assuming full dilution............ 3.64 3.33 4.44 2.10 (7.81) (2.40) 0.92 4.06
Cash dividends...................... 1.47 1.23 0.91 0.80 0.80 0.98 1.50 1.50
Common stock price range (NYSE)
High.............................. 37 1/4 32 7/8 35 33 1/16 24 7/16 18 7/8 24 9/16 28 5/16
Low............................... 27 1/4 24 3/4 25 5/8 21 1/2 13 7/8 11 11/16 12 1/2 20 11/16
Average number of shares of Common
and Class B stock outstanding (in
millions)......................... 1,179 1,071 1,010 986 972 952 926 934
TOTAL COMPANY BALANCE SHEET DATA AT
YEAR-END
Assets
Automotive........................ $ 79,658 $ 72,772 $ 68,639 $ 61,737 $ 57,170 $ 52,397 $ 50,824 $ 45,819
Financial Services................ 183,209 170,511 150,983 137,201 123,375 122,032 122,839 115,074
-------- -------- -------- -------- -------- -------- -------- --------
Total assets.................... $262,867 $243,283 $219,622 $198,938 $180,545 $174,429 $173,663 $160,893
Long-term debt
Automotive........................ $ 6,495 $ 5,475 $ 7,103 $ 7,084 $ 7,068 $ 6,539 $ 4,553 $ 1,137
Financial Services................ 70,641 68,259 58,104 47,900 42,369 43,680 40,779 37,784
Stockholders' equity(f)............. 26,762 24,547 21,659 15,574 14,753 22,690 23,238 22,728
SUMMARY OF OPERATIONS 1988 1987 1986
- --------------------- ---- ---- ----
AUTOMOTIVE
Sales.............................. $ 82,193 $ 71,797 $ 62,868
Operating income/(loss)............ 6,612 6,256 4,142
Income/(loss) before income taxes
and cumulative effects of changes
in accounting principles......... 7,312 6,499 4,299
Income/(loss) before cumulative
effects of changes in accounting
principles(a)(c)................. 4,609 3,767 2,512
-------- -------- --------
Net income/(loss).................. 4,609 3,767 2,512
-------- -------- --------
FINANCIAL SERVICES
Revenues........................... $ 10,253 $ 8,096 $ 6,826
Income before income taxes and
cumulative effects of changes in
accounting principles............ 1,031 1,386 1,321
Income before cumulative effects of
changes in accounting principles
(b)(d)........................... 691 858 773
-------- -------- --------
Net income......................... 691 858 773
-------- -------- --------
TOTAL COMPANY
Income/(loss) before income taxes
and cumulative effects of changes
in accounting principles......... $ 8,343 $ 7,885 $ 5,620
Provision/(credit) for income
taxes............................ 2,999 3,226 2,323
Minority interests in net income of
subsidiaries..................... 44 34 12
-------- -------- --------
Income/(loss) before cumulative
effects of changes in accounting
principles(a)(b)(c)(d)........... 5,300 4,625 3,285
Cumulative effects of changes in
accounting principles............ -- -- --
-------- -------- --------
Net income/(loss).................. $ 5,300 $ 4,625 $ 3,285
======== ======== ========
TOTAL COMPANY DATA PER SHARE OF
COMMON AND CLASS B STOCK(E)
Income/(loss) before cumulative
effects of changes in accounting
principles....................... $ 5.48 $ 4.53 $ 3.08
Income/(loss)
Assuming no dilution............. 5.48 4.53 3.08
Assuming full dilution........... 5.40 4.46 3.03
Cash dividends..................... 1.15 0.79 0.56
Common stock price range (NYSE)
High............................. 27 1/2 28 5/32 15 7/8
Low.............................. 19 1/32 14 7/32 9
Average number of shares of Common
and Class B stock outstanding (in
millions)........................ 968 1,022 1,066
TOTAL COMPANY BALANCE SHEET DATA AT
YEAR-END
Assets
Automotive....................... $ 43,128 $ 39,734 $ 34,021
Financial Services............... 100,239 76,260 59,211
-------- -------- --------
Total assets................... $143,367 $115,994 $ 93,232
Long-term debt
Automotive....................... $ 1,336 $ 2,058 $ 2,467
Financial Services............... 30,777 26,009 19,128
Stockholders' equity(f)............ 21,529 18,493 14,860
- -------------------------
(a) 1989 includes an after-tax loss of $424 million from the sale of Rouge Steel
Company.
(b) 1994 includes an after-tax loss of $440 million from the sale of Granite
Savings Bank (formerly First Nationwide Bank).
(c) 1995 includes a gain of $230 million from the dissolution of Autolatina, the
Company's joint venture with Volkswagen AG in Brazil and Argentina.
(d) 1996 includes gains of $650 million on the sale of The Associates' common
stock and $95 million on the sale of USL Capital's assets, offset partially
by a net write-down of $233 million for Budget Rent a Car Corporation.
(e) Share data have been adjusted to reflect stock dividends and stock splits.
(f) The cumulative effects of changes in accounting principles reduced equity by
$6,883 million in 1992.
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SUMMARY OF
- ---------------------------------
OPERATIONS, CONT. 1996 1995 1994 1993 1992 1991 1990 1989 1988
- --------------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
TOTAL COMPANY FACILITY AND
TOOLING DATA
Capital expenditures for
facilities (excluding special
tools)......................... $ 5,362 $ 5,455 $ 5,236 $ 4,339 $ 3,613 $ 3,611 $ 4,702 $ 4,412 $ 3,148
Depreciation..................... 9,519 8,954 7,207 5,456 4,658 3,956 3,185 2,720 2,458
Expenditures for special tools... 3,289 3,542 3,310 2,475 2,177 2,236 2,556 2,354 1,634
Amortization of special tools.... 3,272 2,765 2,129 2,012 2,097 1,822 1,695 1,509 1,335
TOTAL COMPANY EMPLOYEE DATA --
WORLDWIDE
Payroll.......................... $ 17,609 $ 16,567 $ 15,853 $ 13,750 $ 13,754 $ 12,850 $ 14,014 $ 13,327 $ 13,010
Total labor costs................ 25,687 23,758 22,985 20,065 19,850 17,998 18,962 18,152 18,108
Average number of employees...... 371,702 346,989 337,728 321,925 325,333 331,977 369,547 366,641 358,939
TOTAL COMPANY EMPLOYEE DATA --
U.S. OPERATIONS
Payroll.......................... $ 10,961 $ 10,488 $ 10,381 $ 8,899 $ 8,019 $ 7,393 $ 8,313 $ 8,654 $ 8,477
Average number of employees...... 189,718 186,387 180,861 166,995 158,501 156,203 180,228 188,402 185,651
Average hourly labor costs(g)
Earnings....................... $ 22.30 $ 21.79 $ 21.81 $ 20.94 $ 19.92 $ 19.10 $ 18.44 $ 17.77 $ 17.39
Benefits....................... 19.47 18.66 19.13 18.12 19.24 17.97 14.12 13.21 13.07
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total hourly labor costs..... $ 41.77 $ 40.45 $ 40.94 $ 39.06 $ 39.16 $ 37.07 $ 32.56 $ 30.98 $ 30.46
======== ======== ======== ======== ======== ======== ======== ======== ========
SUMMARY OF VEHICLE UNIT SALES(h)
(IN THOUSANDS)
NORTH AMERICA
United States
Cars......................... 1,656 1,767 2,036 1,925 1,820 1,588 1,870 2,201 2,364
Trucks....................... 2,241 2,226 2,182 1,859 1,510 1,253 1,416 1,517 1,537
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total United States........ 3,897 3,993 4,218 3,784 3,330 2,841 3,286 3,718 3,901
Canada......................... 258 254 281 256 237 259 257 326 349
Mexico......................... 67 32 92 91 126 112 89 87 63
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total North America........ 4,222 4,279 4,591 4,131 3,693 3,212 3,632 4,131 4,313
EUROPE
Britain........................ 516 496 520 464 420 471 607 739 753
Germany........................ 436 409 386 340 407 501 361 326 332
France......................... 194 165 180 150 194 190 185 192 168
Italy.......................... 180 193 179 172 266 301 219 153 98
Spain.......................... 155 160 163 117 165 128 155 173 158
Other countries................ 339 286 281 250 270 296 289 296 290
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Europe............... 1,820 1,709 1,709 1,493 1,722 1,887 1,816 1,879 1,799
OTHER INTERNATIONAL
Brazil......................... 190 201 164 151 117 137 137 157 154
Australia...................... 138 139 125 120 105 104 134 154 132
Taiwan......................... 86 106 97 122 119 107 115 115 88
Argentina...................... 64 48 54 49 49 26 18 25 30
Japan.......................... 52 57 50 53 64 83 99 82 60
Other countries................ 81 67 63 65 71 67 72 65 86
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total other
international............ 611 618 553 560 525 524 575 598 550
TOTAL WORLDWIDE CARS AND
TRUCKS......................... 6,653 6,606 6,853 6,184 5,940 5,623 6,023 6,608 6,662
TOTAL WORLDWIDE TRACTORS(i)...... -- -- -- -- -- 13 66 72 77
-------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL WORLDWIDE VEHICLE UNIT
SALES.......................... 6,653 6,606 6,853 6,184 5,940 5,636 6,089 6,680 6,739
======== ======== ======== ======== ======== ======== ======== ======== ========
SUMMARY OF
- ---------------------------------
OPERATIONS, CONT. 1987 1986
- --------------------------------- ---- ----
TOTAL COMPANY FACILITY AND
TOOLING DATA
Capital expenditures for
facilities (excluding special
tools)......................... $ 2,415 $ 2,179
Depreciation..................... 2,107 1,859
Expenditures for special tools... 1,343 1,285
Amortization of special tools.... 1,353 1,293
TOTAL COMPANY EMPLOYEE DATA --
WORLDWIDE
Payroll.......................... $ 11,670 $ 11,290
Total labor costs................ 16,567 15,610
Average number of employees...... 350,320 382,274
TOTAL COMPANY EMPLOYEE DATA --
U.S. OPERATIONS
Payroll.......................... $ 7,765 $ 7,706
Average number of employees...... 180,944 181,576
Average hourly labor costs(g)
Earnings....................... $ 16.50 $ 16.12
Benefits....................... 12.38 11.01
-------- --------
Total hourly labor costs..... $ 28.88 $ 27.13
======== ========
SUMMARY OF VEHICLE UNIT SALES(H)
(IN THOUSANDS)
NORTH AMERICA
United States
Cars......................... 2,176 2,105
Trucks....................... 1,480 1,406
-------- --------
Total United States........ 3,656 3,511
Canada......................... 349 321
Mexico......................... 35 44
-------- --------
Total North America........ 4,040 3,876
EUROPE
Britain........................ 628 596
Germany........................ 328 320
France......................... 162 151
Italy.......................... 93 85
Spain.......................... 159 112
Other countries................ 285 300
-------- --------
Total Europe............... 1,655 1,564
OTHER INTERNATIONAL
Brazil......................... 129 177
Australia...................... 128 139
Taiwan......................... 55 31
Argentina...................... 33 32
Japan.......................... 49 40
Other countries................ 82 92
-------- --------
Total other
international............ 476 511
TOTAL WORLDWIDE CARS AND
TRUCKS......................... 6,171 5,951
TOTAL WORLDWIDE TRACTORS(I)...... 64 68
-------- --------
TOTAL WORLDWIDE VEHICLE UNIT
SALES.......................... 6,235 6,019
======== ========
- -------------------------
(g) Per hour worked (in dollars). Excludes data for subsidiary companies.
(h) Vehicle unit sales are reported worldwide on a "where sold" basis and
include sales of all Ford-badged units, as well as units manufactured by
Ford and sold to other manufacturers.
(i) Ford's tractor operation, Ford New Holland, was sold on May 6, 1991.
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FINANCIAL REVIEW OF FORD MOTOR COMPANY RESULTS
OVERVIEW
The Company's worldwide net income was $4,446 million in 1996, or $3.64 per
share of Common and Class B Stock (fully diluted), compared with $4,139 million,
or $3.33 per share (fully diluted) in 1995. Results in 1996 and 1995 included
several one-time actions (see below). Income per share in 1995 also included a
one-time reduction of $0.06 per share related to the exchange of Series B
Preferred Stock for company-obligated mandatorily redeemable preferred
securities of a subsidiary trust.
The Company's earnings in 1996 were up $307 million from 1995, reflecting
primarily improved Automotive results in North America and one-time actions and
record operating earnings in Financial Services; higher operating losses in
South America and Europe and a one-time charge for employee separation programs
were partial offsets. The Company's worldwide sales and revenues were $147
billion in 1996, up $9.9 billion or 7% from 1995. Vehicle unit sales of cars and
trucks were 6,653,000, up 47,000 units. Stockholders' equity was $26.8 billion
at December 31, 1996, compared with $24.5 billion at December 31, 1995.
In 1996, Automotive capital expenditures for new products and facilities
totaled $8.2 billion, down $467 million from 1995. Automotive cash and
marketable securities were $15.4 billion at December 31, 1996, up $3 billion
from December 31, 1995. Automotive debt at December 31, 1996 totaled $8.2
billion, up $849 million from a year ago. Automotive net cash was $7.2 billion
at December 31, 1996.
The Company has completed launches of its highest-volume products in North
America (F-Series, Taurus, Sable and Escort) and Europe (Mondeo and Fiesta).
Important new products were launched during 1996 and have received strong
customer reception, including the Expedition, Ka and Jaguar XK8.
FOURTH QUARTER 1996
In fourth quarter 1996, Ford earned $1,204 million, or $0.99 per share of
Common and Class B Stock (fully diluted), compared with $660 million, or $0.48
per share (fully diluted) in fourth quarter 1995. Results in fourth quarter 1996
and 1995 included several one-time actions (see below). Income per share in
fourth quarter 1995 also included a one-time reduction of $0.06 per share
related to the exchange of Series B Preferred Stock.
The Company's net income for fourth quarter 1996 and 1995 was as follows
(in millions):
NET INCOME/(LOSS)
-----------------------
FOURTH FOURTH
QUARTER QUARTER
1996 1995
------- -------
U.S. Automotive............................................. $ 628 $168
Automotive Outside U.S.
Europe.................................................... (88) (48)
South America............................................. (287) (112)
Other..................................................... 137 8
------ ----
Total Automotive Outside U.S........................... (238) (152)
------ ----
Total Automotive....................................... 390 16
------ ----
Financial Services.......................................... 814 644
------ ----
Total Company.......................................... $1,204 $660
====== ====
Earnings for Automotive operations in the U.S. improved in fourth quarter
1996, compared with fourth quarter 1995, as a result of higher margins
(reflecting improved sales mix and cost reductions) and higher volume (up 51,000
units), offset partially by higher product costs and costs for employee
separation programs.
24
26
Higher losses incurred by Automotive operations in Europe were more than
explained by higher costs for employee separation programs. Higher losses
incurred in South America resulted primarily from the nonrecurrence of a gain in
fourth quarter 1995 from the dissolution of the Autolatina joint venture, as
well as costs for employee separation programs; higher margins and volume were
partial offsets.
Higher earnings for Financial Services operations reflected a partial
reversal of a second quarter 1996 provision for losses on notes receivable from
Budget Rent A Car Corporation and record earnings at The Associates and Hertz,
offset partially by lower earnings at Ford Credit and the effect of the sale of
USL Capital's assets.
ONE-TIME ACTIONS
Net income in 1996 and 1995 included several one-time actions, as follows
(in millions):
FOURTH QUARTER FULL YEAR
--------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
Automotive
Employee separation programs.............................. $ (336) $(129) $(436) $(146)
Autolatina dissolution.................................... -- 230 -- 230
Financial Services
Sale of The Associates' common stock...................... -- -- 650 --
Sale of USL Capital's assets.............................. -- -- 95 --
Net write-down for Budget Rent a Car Corporation.......... 204 -- (233) --
------ ----- ----- -----
Total Company.......................................... $ (132) $ 101 $ 76 $ 84
====== ===== ===== =====
Per share.............................................. $(0.11) $0.03* $0.06 $0.02*
- -------------------------
* Includes $0.06 per share reduction for exchange of Series B Preferred Stock
RESULTS OF OPERATIONS
The Company's net income for worldwide Automotive operations in 1996, 1995
and 1994, was as follows (in millions):
NET INCOME/(LOSS)
--------------------------
1996 1995 1994
---- ---- ----
U.S. Automotive............................................. $2,007 $1,843 $3,002
Automotive Outside U.S.
Europe.................................................... (291) 116 128
South America............................................. (642) (94) 496
Other..................................................... 581 191 287
------ ------ ------
Total Automotive Outside U.S........................... (352) 213 911
------ ------ ------
Total Automotive..................................... $1,655 $2,056 $3,913
====== ====== ======
25
27
The Company's net income for worldwide Financial Services operations in
1996, 1995 and 1994, was as follows (in millions):
NET INCOME/(LOSS)
--------------------------
1996 1995 1994
---- ---- ----
Ford Credit................................................. $1,441 $1,579 $1,487
The Associates.............................................. 857* 723 603
USL Capital................................................. 191 135 109
Hertz....................................................... 159 105 92
One-Time Actions............................................ 512 0 (440)
Minority Interests, Eliminations and Other.................. (369) (459) (456)
------ ------ ------
Total Financial Services.................................... $2,791 $2,083 $1,395
====== ====== ======
- -------------------------
* Ford's share was $745 million
1996 RESULTS OF OPERATIONS
AUTOMOTIVE OPERATIONS
Earnings for Automotive operations in the U.S. were up $164 million in 1996
compared with a year ago. The increase resulted from higher margins (reflecting
improved sales mix and cost reductions), offset partially by higher product
costs and costs for employee separation programs. The after-tax return on sales
was 2.7% in 1996, up 2/10 of a point from a year ago.
The U.S. economy continued to grow at a moderate rate in 1996, with
interest rates and inflation at comparatively low levels. Car and truck industry
volumes totaled 15.5 million units in 1996, compared with 15.1 million units in
1995. The increase in industry sales was more than explained by higher truck
industry sales. Ford's U.S. car market share was 20.6%, down 3/10 of a point
from 1995. Ford's U.S. truck share was 31.1%, down 8/10 of a point from 1995.
Ford's combined U.S. car and truck share was 25.2%, down 4/10 of a point from
1995. Reduced sales of lower margin fleet vehicles account for the decline. The
Company expects car and truck industry sales in 1997 to be about equal to 1996.
Unfavorable results for Automotive operations in Europe, compared with a
year ago, reflected costs associated with launching new products, adverse
vehicle mix, higher marketing costs, and costs for employee separation programs,
offset partially by higher volume. In 1996, the European automotive industry
experienced increased competition as a result of industry overcapacity, as well
as a market shift to lower profit smaller cars. This trend is expected to
continue in 1997 and beyond. Ford is continuing to focus on cost reductions,
including vehicle cost reductions, and the rationalization of manufacturing
capacity. Its recently launched new products (the Fiesta, Ka and an updated
Mondeo) will strengthen Ford's European product offerings.
European car and truck industry volumes totaled 14.3 million units in 1996,
compared with 13.4 million units in 1995. Ford's European car market share was
11.6%, down 2/10 of a point from 1995. Ford's European truck share was 13.1%,
down 1.4 points from 1995. Ford's combined European car and truck share was
11.8%, down 4/10 of a point from 1995, reflecting primarily reduced sales of
lower margin fleet vehicles. Car and truck industry sales in 1997 are expected
to be about equal to 1996.
Higher losses in 1996 incurred by Automotive operations in South America
reflected primarily higher losses for operations in Brazil as a result of a long
and costly launch process following the dissolution of the Autolatina joint
venture with Volkswagen AG. Costs for employee separation programs, in addition
to increased competition and a market shift to smaller (Fiesta-sized) cars that
resulted in lower market share, also affected results unfavorably. The Company
is in the process of reestablishing operations in Brazil and Argentina. Losses
in Brazil are expected to continue in 1997. To improve the competitiveness of
its product offerings in Brazil, Ford will have several new products (the Ka,
Fiesta, Escort and Ranger) available for sale throughout most of 1997. In
addition, Ford is focusing on further facility rationalization in the region.
26
28
COMPARISON OF AUTOMOTIVE SALES AND TOTAL COSTS AND EXPENSES
Automotive sales totaled $118 billion in 1996, up 6.8% from 1995. Sales in
the U.S. were $76 billion in 1996 compared with $73.9 billion in 1995, and sales
outside the U.S. were $42 billion in 1996 compared with $36.6 billion in 1995.
Total costs and expenses were $115.5 billion in 1996, up 7.7% from 1995.
Approximately half of the increase in sales and total costs and expenses was
attributable to the inclusion in the Company's consolidated results of
operations, beginning in 1996, of the sales and total costs and expenses for new
entities in Brazil and Argentina resulting from the dissolution of the
Autolatina joint venture. Amounts for 1995 exclude these new entities. The
balance of the increase in sales and total costs and expenses was attributable
primarily to the effects of higher unit volume and a richer sales mix, as well
as costs for employee separation programs.
Research and development expense totaled $6,821 million in 1996, up 3% from
1995. The increase was more than explained by the inclusion of research and
development expense for new entities in Brazil and Argentina and support for new
markets.
FINANCIAL SERVICES OPERATIONS
Earnings for Financial Services operations were up $708 million in 1996,
compared with a year ago, including $512 million from the one-time actions
described above. Improvements from operations totaled $196 million.
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for the discussion of Ford Credit's 1996 results of
operations.
Record earnings at The Associates reflected primarily higher levels of
earning assets, lower operating costs and improved net interest margins, offset
partially by higher credit losses. Credit losses as a percent of average net
finance receivables were 2.03% in 1996, compared with 1.70% in 1995. The
Associates believes the higher levels of credit losses may continue.
Record earnings at Hertz reflected primarily higher volume in car rental
and equipment rental operations.
LIQUIDITY AND CAPITAL RESOURCES
AUTOMOTIVE OPERATIONS
Automotive cash and marketable securities were $15.4 billion at December
31, 1996, up $3 billion from December 31, 1995. The Company paid $1.8 billion in
cash dividends on its Common Stock, Class B Stock and Preferred Stock during
1996.
Automotive capital expenditures were $8.2 billion in 1996, down $467
million from 1995. Automotive capital expenditures as a percentage of sales was
7% in 1996, down 9/10 of a point from 1995. During the next several years,
Ford's spending for product change is expected to be at similar or higher
levels; however, as a percentage of sales, spending is expected to be at similar
or lower levels.
Automotive debt at December 31, 1996 totaled $8.2 billion, which was 23% of
total capitalization (stockholders' equity and Automotive debt), compared with
$7.3 billion, or 22% of total capitalization, at December 31, 1995.
FINANCIAL SERVICES OPERATIONS
The Financial Services operations rely heavily on their ability to raise
substantial amounts of funds in the capital markets in addition to collections
on loans and retained earnings. The levels of funds for certain Financial
Services operations are affected by transactions with Ford, such as capital
contributions, dividend payments and the timing of payments for income taxes.
The ability to obtain funds also is affected by debt ratings which, for certain
operations, are closely related to the financial condition and outlook for Ford
and the nature and availability of support facilities, such as revolving credit
and receivables sales facilities.
Ford Credit's outstanding commercial paper totaled $38 billion at December
31, 1996 with an average remaining maturity of 34 days. Support facilities
represent additional sources of funds, if required.
27
29
DERIVATIVE FINANCIAL INSTRUMENTS
Ford is exposed to a variety of market risks, including the effects of
changes in foreign currency exchange rates, interest rates and commodity prices.
For Automotive operations, purchases and sales of finished vehicles and
production parts, debt and other payables, subsidiary dividends, and investments
in subsidiaries are frequently denominated in foreign currencies, thereby
creating exposures to changes in exchange rates. In addition, Ford also is
exposed to changes in prices of commodities used in its Automotive operations.
Financial Services operations issue debt and other payables with various
maturity and interest rate structures to ensure funding over business and
economic cycles and to minimize overall borrowing costs. The maturity and
interest rate structures frequently differ from the invested assets. Exposures
to fluctuations in interest rates are created by the difference in maturities of
liabilities versus the maturities of assets.
These financial exposures are monitored and managed by the Company as an
integral part of the Company's overall risk management program, which recognizes
the unpredictability of financial markets and seeks to reduce the potentially
adverse effect on the Company's results. The effect of changes in exchange
rates, interest rates and commodity prices on Ford's earnings generally has been
small relative to other factors that also affect earnings, such as unit sales
and operating margins.
YEAR 2000 DATE CONVERSION
The Company has established a central office to coordinate the
identification, evaluation and implementation of changes to computer systems and
applications necessary to achieve a year 2000 date conversion with no effect on
customers or disruption to business operations. These actions are necessary to
ensure that the systems and applications will recognize and process the year
2000 and beyond. Major areas of potential business impact have been identified
and are being dimensioned, and initial conversion efforts are underway. The
Company also is communicating with suppliers, dealers, financial institutions
and others with which it does business to coordinate year 2000 conversion. The
total cost of compliance and its effect on the Company's future results of
operations is being determined as part of the detailed conversion planning.
ITEM 2. FORD CREDIT PROPERTIES
Substantially all of Ford Credit's branch operations presently are being
conducted from leased properties. At December 31, 1996, Ford Credit's aggregate
obligation under leases of real property was $39.9 million.
ITEM 3. FORD CREDIT LEGAL PROCEEDINGS
Various legal actions, governmental proceedings, and other claims are
pending or may be instituted or asserted in the future against Ford Credit and
its subsidiaries.
Ford Credit is a defendant in actions asserting claims under the antitrust
laws and the Automobile Dealers' Day in Court Act resulting from Ford Credit's
termination of financing relationships with former automobile dealers, and
actions alleging violations of various state and federal regulatory laws
concerning financing and insurance, based upon technical interpretations of
their requirements. Some of these matters involve or may involve class actions,
compensatory, punitive or treble damage claims and attorneys fees in very large
amounts, or other requested relief which, if granted, would require very large
expenditures.
The Federal Trade Commission and the Department of Justice are continuing
their investigation, commenced in 1995, of the retail financing credit practices
of Ford Credit for compliance with the Equal Credit Opportunity Act and
Regulation B.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All shares of the registrant's Common Stock at December 31, 1996 were owned
by Ford and, accordingly, there was no market for such stock. During 1996, Ford
Credit declared and paid cash dividends of $949 million. Dividends also were
paid to Ford in 1995, 1994, 1993, 1992 and 1991. Ford Credit may pay additional
dividends from time to time depending on Ford Credit's receivables levels,
capital requirements, and profitability.
28
30
ITEM 6. SELECTED FINANCIAL DATA
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
SELECTED INCOME STATEMENT DATA (IN MILLIONS)
Financing revenue
Operating leases.......................................... $ 8,224 $ 7,301 $ 5,596 $3,829 $2,579
Retail.................................................... 5,001 4,523 4,042 4,120 4,292
Wholesale................................................. 1,646 1,875 1,329 1,071 1,292
Diversified............................................... 84 152 124 144 200
Other................................................... 393 355 287 237 240
------- ------- ------- ------ ------
Total finance revenue....................................... 15,348 14.206 11,378 9,401 8,603
Insurance premiums earned................................... 226 -- -- -- --
Investment and other income................................. 1,041 791 469 403 249
Total revenue............................................... 16,615 14,997 11,847 9,804 8,852
Interest expense............................................ 6,224 5,998 4,209 3,675 4,152
Depreciation on operating leases............................ 5,538 5,235 4,083 2,835 1,826
Operating expenses.......................................... 1,468 1,211 1,159 1,025 957
Provision for credit losses................................. 993 480 294 319 486
Other insurance expense..................................... 207 -- -- -- --
------- ------- ------- ------ ------
Total expenses.............................................. 14,430 12,924 9,745 7,854 7,421
Equity in net income of affiliated companies................ 55 255 233 198 155
------- ------- ------- ------ ------
Income before income taxes and cumulative effects of changes
in accounting principles.................................. 2,240 2,328 2,335 2,148 1,586
Provision for income taxes.................................. 731 683 789 778 531
Minority interest........................................... 68 66 59 45 42
------- ------- ------- ------ ------
Income before cumulative effects of changes in accounting
principles................................................ 1,441 1,579 1,487 1,325 1,013
Cumulative effects of changes in accounting principles...... -- -- -- -- 169
------- ------- ------- ------ ------
Net income.............................................. $ 1,441 $ 1,579 $ 1,487 $1,325 $1,182
======= ======= ======= ====== ======
Net income from financing operations........................ $ 1,386 $ 1,324 $ 1,254 $1,127 $ 858
Net income from affiliated companies........................ 55 255 233 198 155
Cumulative effects of changes in accounting principles...... -- -- -- -- 169
Cash dividends.............................................. 949 816 389 413 691
Return on Equity............................................ 16.1% 19.3% 20.6% 21.4% 21.5%
Earnings-to-fixed charges ratio............................. 1.3 1.3 1.5 1.5 1.3
SELECTED BALANCE SHEET (IN BILLIONS)
Finance Receivables
Retail.................................................... $ 53.1 $ 47.7 $ 43.5 $ 39.0 $ 36.3
Wholesale................................................. 22.7 22.1 19.8 15.4 13.6
Diversified............................................... 0.5 2.3 2.2 2.1 2.4
Other..................................................... 5.4 5.1 4.5 3.8 3.6
------- ------- ------- ------ ------
Total finance receivables................................... 81.7 77.2 70.0 60.3 55.9
Deduct: Allowance for credit losses....................... (0.9) (0.8) (0.8) (0.8) (0.9)
------- ------- ------- ------ ------
Finance receivables, net.................................... $ 80.8 $ 76.4 $ 69.2 $ 59.5 $ 55.0
======= ======= ======= ====== ======
Operating leases, net....................................... $ 30.7 $ 25.7 $ 20.8 $ 13.2 $ 8.2
======= ======= ======= ====== ======
Assets
Financing operations...................................... $ 121.7 $ 109.5 $ 95.4 $ 78.3 $ 67.1
Equity in net assets of affiliated companies.............. -- 1.7 1.3 1.2 1.0
------- ------- ------- ------ ------
Total assets................................................ $ 121.7 $ 111.2 $ 96.7 $ 79.5 $ 68.1
======= ======= ======= ====== ======
CAPITALIZATION (IN BILLIONS)
Debt payable within one year................................ $ 52.2 $ 49.6 $ 45.4 $ 39.2 $ 33.8
Debt payable after one year
Senior.................................................... 45.5 42.3 35.6 27.6 24.1
Subordinated and other.................................... 0.3 0.3 -- -- --
------- ------- ------- ------ ------
Total debt payable after one year........................... 45.8 42.6 35.6 27.6 24.1
------- ------- ------- ------ ------
Total debt.................................................. 98.0 92.2 81.0 66.8 57.9
Stockholder's equity........................................ 9.2 8.7 7.7 6.7 5.6
------- ------- ------- ------ ------
Total capital............................................... $ 107.2 $ 100.9 $ 88.7 $ 73.5 $ 63.5
======= ======= ======= ====== ======
Debt-to-equity ratio (to 1)................................. 10.6 10.6 10.5 10.0 10.3
Debt payable within one year as percent of total capital.... 48.7% 49.2% 51.1% 53.3% 53.2%
29
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The principal factors that influence the earnings of Ford Credit are
interest margins and the levels of finance receivables and net investment in
operating leases.
Net interest margins reflect the difference between interest rates earned
on finance receivables, including operating leases net of depreciation
("yields"), and the rates paid on borrowed funds. Yields on most receivables and
operating leases generally are fixed at the time the contracts are acquired. On
some receivables, primarily wholesale financing, yields vary with changes in
short-term interest rates. Borrowed funds include short-term debt, the cost of
which reflects changes in short-term interest rates, and long-term debt, the
cost of which generally is fixed at the time of the debt placement.
Interest-rate swap agreements are used to hedge movements in interest rates
related to borrowings and to manage the match between the interest rates of
assets and liabilities.
The levels of finance receivables and net investment in operating leases
depend primarily on the volume of Ford Motor Company vehicle sales, the extent
to which Ford Credit provides the wholesale and retail financing of those sales,
and sales of receivables. Ford periodically sponsors special financing programs
that are available exclusively through Ford Credit which provide payments to
Ford Credit for interest supplements and other support costs on certain
financing and leasing transactions. These programs can increase Ford Credit's
financing volume of Ford Motor Company vehicles.
RESULTS OF OPERATIONS
1996 COMPARED WITH 1995
Ford Credit's consolidated net income in 1996 was $1,441 million, down $138
million or 9% from 1995. Ford Credit's 1996 financial results include a majority
ownership (78%) of Ford Credit Europe and results for 1995 and prior years have
been restated to reflect this ownership change. Compared with record results
from a year ago, the decrease primarily reflects the effects of the first
quarter restructuring of Ford's Financial Services Group ("FSG"), higher credit
losses and higher loss reserve requirements. Higher levels of earning assets and
improved net interest margins were a partial offset.
The FSG restructuring reflects lower income resulting from the repurchase
in the first quarter of 1996 by Ford Holdings of substantially all the shares of
Ford Holdings' common stock owned by Ford Credit, offset partially by the
addition of American Road and interest on a note receivable from Ford Holdings.
Credit losses as a percent of average net finance receivables including net
investment in operating leases increased to 0.78% in 1996 compared with 0.51% in
1995 reflecting an increase in repossession rates and higher losses per
repossession. The increased repossession ratio reflects an increased mix of used
vehicle financing and expanded purchase policies to generate financing volume.
The increase in loss per repossession reflects a weaker used vehicle market
resulting in Ford Credit realizing lower prices for repossessed units sold at
auction. Management believes the higher levels of credit losses may continue in
1997.
Improved net interest margins reflect a reduction in portfolio borrowing
rates to 6.5% in 1996, down from 6.9% in 1995, partially offset by a reduction
in portfolio yields on finance receivables and operating leases. The increase in
earning assets reflects a higher level of operating leases and retail
installment sale receivables. Total net finance receivables and net investment
in operating leases at December 31, 1996 were $111.5 billion, up $9.4 billion or
9% from a year earlier.
For 1996, Ford Credit financed 38% of all new cars and trucks sold by Ford
Motor Company dealers in the U.S. compared with 37% in 1995. In Europe, Ford
Credit financed 29% of all new vehicles sold by Ford Motor Company dealers in
1996 compared with 30% in 1995. Ford Credit provided retail customers with
financing for 2.7 million new and used vehicles in the United States and 0.7
million in Europe. In 1996, Ford Credit provided wholesale financing for 80% of
Ford Motor Company U.S. factory sales and 91% of Ford Motor Company Europe
factory sales compared with 80% for the U.S. and 89% for Europe in 1995.
30
32
As part of Ford's sale of USL Capital's assets, the majority of Ford
Credit's diversified assets, managed by USL Capital, was sold. The sale of the
diversified assets did not have a material impact on Ford Credit's results.
For the Fourth Quarter of 1996, Ford Credit's consolidated net income was
$385 million, down $70 million from 1995. The deterioration reflects higher
credit losses and the effects of FSG restructuring, offset partially by higher
net interest margins and higher financing volume.
1995 COMPARED WITH 1994
Ford Credit's consolidated net income in 1995 was a record $1,579 million,
up $92 million or 6% from 1994. Compared with results from a year ago, the
increase primarily reflects higher levels of earning assets, improved operating
cost performance, higher gains from sale of receivables, and lower taxes. Lower
net interest margins, higher credit losses, and the non-recurrence of a one-time
gain from the sale of Ford Credit's investment in Manheim Auctions were a
partial offset.
Total net finance receivables and net investment in operating leases at
December 31, 1995 were $102.1 billion, up $12.1 billion or 13% from a year
earlier. The higher financing volume reflects primarily an increase in operating
leases and retail installment sale receivables.
For 1995 and 1994, Ford Credit financed 37% of all new cars and trucks sold
by Ford Motor Company dealers in the U.S. In Europe, Ford Credit financed 30% of
all new vehicles sold by Ford Motor Company in 1995 compared with 29% in 1994.
Ford Credit provided retail customers with financing for 2.5 million new and
used vehicles in the United States and 0.7 million in Europe. In 1995, Ford
Credit provided wholesale financing for 80% of Ford Motor Company U.S. factory
sales and 89% of Ford Motor Company Europe factory sales compared with 82% for
the U.S. and 88% for Europe in 1994.
The decline in net interest margins reflects an increase in portfolio
borrowing rates from 5.7% in 1994 to 6.9% in 1995, partially offset by higher
portfolio yields on finance receivables and operating leases.
Credit losses increased in 1995, reversing a general trend of improvement
that began in 1989. Credit losses as a percent of average net finance
receivables including net investment in operating leases were 0.51% in 1995
compared with 0.27% in 1994 reflecting an increase in repossession rates and
higher loss per repossession.
For 1995, equity in net income of affiliated companies (primarily Ford
Holdings) was $255 million compared with $233 million in 1994. The increase
reflected higher Ford Holdings net income available to common shareholders. At
December 31, 1995, Ford Credit owned about 45% of Ford Holdings common stock.
Additional information called for by Item 7 is incorporated herein by
reference from Item 1 -- Business -- "Business of Ford Credit -- Credit Loss
Experience", "Business of Ford Credit -- Borrowings and Other Sources of Funds",
and "Certain Transactions with Ford and Affiliates", and Item 8 -- "Financial
Statements and Supplementary Data".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by Item 8 is set forth at pages FC-1 through
FC-25 of this Form 10-K Report, is incorporated herein by reference and is
listed in the Index to Financial Statements as set forth in Item 14(a)(1) and
14(a)(2).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Report of Independent Accountants
31
33
Ford Motor Credit Company and Subsidiaries
Consolidated Statement of Income and of Earnings Retained for Use in the
Business for the Years Ended December 31, 1996, 1995 and 1994.
Consolidated Balance Sheet, December 31, 1996 and 1995.
Consolidated Statement of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994.
Notes to Financial Statements.
The financial statements and notes to financial statements listed above and
the schedule listed below are incorporated by reference in Item 8 of this Report
from pages FC-1 through FC-25 of this Form 10-K Report.
Information regarding significant restrictions on the ability of
subsidiaries to transfer funds to the registrant, and condensed financial
information of the registrant are omitted because the amounts related to such
restrictions are not sufficient to require submission.
(a) 2. Financial Statement Schedules
Schedules have been omitted because the subject matter is disclosed
elsewhere in the financial statements and notes thereto, is not required,
is not present, or is not present in amounts sufficient to require
submission.
(a) 3. Exhibits
DESIGNATION DESCRIPTION METHOD OF FILING
- ----------- ----------- ----------------
Exhibit 3-A Restated Certificate of Incorporation Filed as Exhibit 3-A to Ford Motor
of Ford Motor Credit Company. Credit Company Report on Form 10-K
for the year ended December 31, 1987
and incorporated herein by reference.
File No. 1-6368.
Exhibit 3-B By-Laws of Ford Motor Credit Company as Filed as Exhibit 3-B to Ford Motor
amended through March 2, 1988. Credit Company Report on Form 10-K
for the year ended December 31, 1987
and incorporated herein by reference.
File No. 1-6368.
Exhibit 4-A Form of Indenture dated as of August 1, Filed as Exhibit 4-A to Ford Motor
1984 between Ford Motor Credit Company Credit Company Registration Statement
and The Chase Manhattan Bank (National No. 2-92561 and incorporated herein
Association) relating to Debt by reference.
Securities.
Exhibit 4-A-1 Form of First Supplemental Indenture Filed as Exhibit 4-C to Ford Motor
dated August 15, 1986 between Ford Credit Company Registration Statement
Motor Credit Company and The Chase No. 33-8126 and incorporated herein
Manhattan Bank (National Association) by reference.
supplementing the Indenture designated
as Exhibit 4-A.
32
34
DESIGNATION DESCRIPTION METHOD OF FILING
- ----------- ----------- ----------------
Exhibit 4-A-2 Form of Second Supplemental Indenture Filed as Exhibit 4-B to Ford Motor
dated as of October 15, 1986 between Credit Company Current Report on Form
Ford Motor Credit Company and The Chase 8-K dated October 17, 1986 and
Manhattan Bank (National Association) incorporated herein by reference.
supplementing the Indenture designated File No. 1-6368.
as Exhibit 4-A.
Exhibit 4-B Form of Indenture dated as of February Filed as Exhibit 4-A to Ford Motor
1, 1985 between Ford Motor Credit Credit Company Registration Statement
Company and Manufacturers Hanover Trust No. 2-95568 and incorporated herein
Company relating to Debt Securities. by reference.
Exhibit 4-B-1 Form of First Supplemental Indenture Filed as Exhibit 4-B to Ford Motor
dated as of April 1, 1986 between Ford Credit Company Current Report on Form
Motor Credit Company and Manufacturers 8-K dated April 29, 1986 and
Hanover Trust Company supplementing the incorporated herein by reference.
Indenture designated as Exhibit 4-B. File No. 1-6368.
Exhibit 4-B-2 Form of Second Supplemental Indenture Filed as Exhibit 4-B to Ford Motor
dated as of September 1, 1986 between Credit Company Current Report on Form
Ford Motor Credit Company and 8-K dated August 28, 1986 and
Manufacturers Hanover Trust Company incorporated herein by reference.
supplementing the Indenture designated File No. 1-6368.
as Exhibit 4-B.
Exhibit 4-B-3 Form of Third Supplemental Indenture Filed as Exhibit 4-E to Ford Motor
dated as of March 15, 1987 between Ford Credit Company Registration Statement
Motor Credit Company and Manufacturers No. 33-12928 and incorporated herein
Hanover Trust Company supplementing the by reference.
Indenture designated as Exhibit 4-B.
Exhibit 4-B-4 Form of Fourth Supplemental Indenture Filed as Exhibit 4-F to
dated as of April 15, 1988 between Ford Post-Effective Amendment No. 1 to
Motor Credit Company and Manufacturers Ford Motor Credit Company
Hanover Trust Company supplementing the Registration No. 33-20081 and
Indenture designated as Exhibit 4-B. incorporated herein by reference.
Exhibit 4-B-5 Form of Fifth Supplemental Indenture Filed as Exhibit 4-G to Ford Motor
dated as of September 1, 1990 between Credit Company Registration Statement
Ford Motor Credit Company and No. 33-36946 and incorporated hereby
Manufacturers Hanover Trust Company by reference.
supplementing the Indenture designated
as Exhibit 4-B.
33
35
DESIGNATION DESCRIPTION METHOD OF FILING
- ----------- ----------- ----------------
Exhibit 4-C Indenture dated as of November 1, 1987 Filed as Exhibit 4-A to Ford Motor
between Ford Motor Credit Company and Credit Company Current Report on Form
Continental Bank, National Association 8-K dated December 10, 1990 and
relating to Debt Securities. incorporated herein by reference.
File No. 1-6368.
Exhibit 4-D Indenture dated as of August 1, 1994 Filed as Exhibit 4-A to Ford Motor
between Ford Motor Credit Company and Credit Company Registration Statement
First Fidelity Bank, National No. 33-55237.
Association relating to Debt
Securities.
Exhibit 10-J Copy of Amended and Restated Profit Filed as Exhibit 10-J to Ford Motor
Maintenance Agreement dated as of July Credit Company Report on Form 10-K
1, 1993 between Ford Motor Credit for the year ended December 31, 1993
Company and Ford Motor Company. and incorporated herein by reference.
File No. 1-6368.
Exhibit 10-X Copy of Agreement dated as of February Filed as Exhibit 10-X to Ford Motor
1, 1980 between Ford Motor Company and Credit Company Report on Form 10-K
Ford Motor Credit Company. for the year ended December 31, 1980
and incorporated herein by reference.
File No. 1-6368.
Exhibit 12-A Calculation of Ratio of Earnings to Filed with this Report.
Fixed Charges of Ford Credit.
Exhibit 12-B Calculation of Ratio of Earnings to Filed with this Report.
Combined Fixed Charges and Preferred
Stock Dividends to Ford.
Exhibit 23 Consent of Independent Accountants. Filed with this Report.
Exhibit 24 Powers of Attorney. Filed with this Report.
Instruments defining the rights of holders of certain issues of long-term
debt of the registrant 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 the registrant. The registrant 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 Reports on Form 8-K during the quarter
ended December 31, 1996, none of which contained financial statements:
DATE OF REPORT ITEM
- -------------- ----
October 16, 1996.................................. Item 5 -- Other Events
October 24, 1996.................................. Item 5 -- OtherEvents
34
36
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Ford Motor Credit Company
By KENNETH WHIPPLE*
------------------------------------
(Kenneth Whipple, Chairman of the
Board of Directors)
Date: March 21, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
KENNETH WHIPPLE* Chairman of the Board of Directors and March 21, 1997
- --------------------------------------------- Director (principal executive officer)
(Kenneth Whipple)
KENNETH J. COATES* Director and Executive Vice President-- March 21, 1997
- --------------------------------------------- Finance and Administration
(Kenneth J. Coates)
JAMES B. SMITH* Vice President -- Finance and March 21, 1997
- --------------------------------------------- Controller (principal accounting
(James B. Smith) officer)
JOHN G. CLISSOLD* Director March 21, 1997
- ---------------------------------------------
(John G. Clissold)
EDSEL B. FORD II* Director March 21, 1997
- ---------------------------------------------
(Edsel B. Ford II)
JOHN M. DEVINE* Director March 21, 1997
- ---------------------------------------------
(John M. Devine)
GREGORY C. SMITH* Director March 21, 1997
- ---------------------------------------------
(Gregory C. Smith)
MALCOLM S. MACDONALD* Director March 21, 1997
- ---------------------------------------------
(Malcolm S. Macdonald)
*By RICHARD P. CONRAD
---------------------------
(Richard P. Conrad,
Attorney-in-Fact)
35
37
INDEX TO FINANCIAL STATEMENTS
Ford Motor Credit Company and Subsidiaries
Report of Independent Accountants........................... FC-1
Consolidated Statement of Income and of Earnings Retained
for Use in the Business................................... FC-2
Consolidated Balance Sheet.................................. FC-3
Consolidated Statement of Cash Flows........................ FC-4
Notes to Financial Statements............................... FC-5
38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder
of Ford Motor Credit Company:
We have audited the consolidated balance sheets of Ford Motor Credit
Company and Subsidiaries at December 31, 1996 and 1995, and the related
consolidated statements of income and of earnings retained for use in the
business and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Ford Motor
Credit Company and Subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
Detroit, Michigan
January 27, 1997
FC-1
39
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME AND OF EARNINGS
RETAINED FOR USE IN THE BUSINESS
(IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31
---------------------------------
1996 1995 1994
---- ---- ----
Financing revenue
Operating leases.......................................... $ 8,223.6 $ 7,300.8 $ 5,596.4
Retail.................................................... 5,000.7 4,522.7 4,041.9
Wholesale................................................. 1,645.8 1,875.2 1,328.6
Diversified............................................... 84.0 152.2 124.0
Other..................................................... 393.5 354.9 286.9
--------- --------- ---------
Total financing revenue.............................. 15,347.6 14,205.8 11,377.8
Insurance premiums earned................................... 225.7 -- --
Investment and other income................................. 1,041.4 791.4 469.8
--------- --------- ---------
Total revenue........................................ 16,614.7 14,997.2 11,847.6
Expenses
Interest expense.......................................... 6,224.2 5,998.3 4,209.3
Depreciation on operating leases.......................... 5,537.6 5,235.1 4,083.0
Operating expenses........................................ 1,467.4 1,211.0 1,158.4
Provision for credit losses............................... 993.3 480.4 293.9
Other insurance expenses.................................. 207.3 -- --
--------- --------- ---------
Total expenses....................................... 14,429.8 12,924.8 9,744.6
--------- --------- ---------
Equity in net income of affiliated companies................ 55.3 255.4 232.5
--------- --------- ---------
Income before income taxes.................................. 2,240.2 2,327.8 2,335.5
Provision for income taxes.................................. 731.6 682.9 789.0
--------- --------- ---------
Income before minority interests............................ 1,508.6 1,644.9 1,546.5
Minority interests in net income of subsidiaries............ 68.0 65.5 59.3
--------- --------- ---------
Net income.................................................. 1,440.6 1,579.4 1,487.2
Earnings retained for use in the business
Beginning of year......................................... 6,724.5 5,961.4 4,862.7
Dividends
Cash................................................... (949.0) (816.3) (388.5)
Other.................................................. (324.0) -- --
--------- --------- ---------
End of year.......................................... $ 6,892.1 $ 6,724.5 $ 5,961.4
========= ========= =========
The accompanying notes are an integral part of the financial statements.
FC-2
40
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
DECEMBER 31
------------------------
1996 1995
---- ----
ASSETS
Cash and cash equivalents................................. $ 2,716.0 $ 1,478.1
Investments in securities................................. 1,324.8 1,914.3
Finance receivables, net.................................. 80,848.0 76,376.7
Net investment, operating leases.......................... 30,645.2 25,680.2
Notes and accounts receivable from affiliated companies... 1,133.0 672.9
Equity in net assets of affiliated companies.............. 44.4 1,730.5
Other assets.............................................. 4,985.0 3,405.2
---------- ----------
Total assets.................................... $121,696.4 $111,257.9
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Accounts payable
Trade, customer deposits, and dealer reserves........ $ 3,362.6 $ 1,785.1
Affiliated companies................................. 2,315.2 1,898.4
---------- ----------
Total accounts payable.......................... 5,677.8 3,683.5
Debt................................................... 98,024.3 92,180.3
Deferred income taxes.................................. 4,260.4 3,109.8
Other liabilities and deferred income.................. 2,929.9 2,340.2
---------- ----------
Total liabilities............................... 110,892.4 101,313.8
Minority interests in net assets of subsidiaries.......... 1,313.8 988.9
Preferred stockholder's equity in a subsidiary company.... 284.5 284.5
Stockholder's Equity
Capital stock, par value $100 a share, 250,000 shares
authorized, issued and outstanding.................... 25.0 25.0
Paid-in surplus (contributions by stockholder)......... 3,749.6 1,904.5
Note receivable from affiliated company................ (1,517.0) --
Unrealized gain on investments in securities available
for sale, net of taxes................................ 56.9 30.9
Foreign currency translation adjustments............... (0.9) (14.2)
Earnings retained for use in the business.............. 6,892.1 6,724.5
---------- ----------
Total stockholder's equity...................... 9,205.7 8,670.7
---------- ----------
Total liabilities and stockholder's equity...... $121,696.4 $111,257.9
========== ==========
The accompanying notes are an integral part of the financial statements.
FC-3
41
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities
Net income............................................. $ 1,440.6 $ 1,579.4 $ 1,487.2
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for credit losses......................... 993.3 480.4 293.9
Depreciation and amortization....................... 5,870.4 5,294.4 4,143.1
Gain on sales of finance receivables................ (55.9) (69.2) (11.4)
Equity in net income of affiliates.................. (55.3) (255.4) (232.5)
Deferred income taxes............................... 1,105.6 560.7 386.6
Changes in the following items
Other assets...................................... (286.0) (725.4) (328.5)
Other liabilities................................. 1,467.8 785.2 645.3
Other............................................... (272.1) 218.0 (20.7)
---------- ---------- ----------
Net cash provided by operating activities...... 10,208.4 7,868.1 6,363.0
---------- ---------- ----------
Cash flows from investing activities
Purchase of finance receivables (other than
wholesale).......................................... (40,019.4) (35,761.3) (34,415.4)
Collection of finance receivables (other than
wholesale).......................................... 33,477.7 28,293.0 28,413.2
Net change in wholesale receivables.................... (2,127.6) (4,035.5) (5,338.4)
Proceeds from sales of finance receivables and
operating leases.................................... 4,668.7 5,422.6 3,154.9
Purchase of operating lease vehicles................... (21,264.0) (18,102.6) (15,635.7)
Liquidation of operating lease vehicles................ 10,340.5 7,342.3 4,235.8
Proceeds from sale/maturity of investment securities... 5,767.4 76.4 --
Purchase of investment securities...................... (4,730.1) -- --
Other.................................................. 110.4 (440.7) (485.7)
---------- ---------- ----------
Net cash used in investing activities.......... (13,776.4) (17,205.8) (20,071.3)
---------- ---------- ----------
Cash flows from financing activities
Proceeds from issuance of long-term debt............... 13,433.5 15,528.4 14,692.8
Principal payments on long-term debt................... (8,322.4) (7,189.1) (9,853.0)
Change in short-term debt, net......................... 816.9 2,338.7 8,291.2
Cash dividends paid.................................... (949.0) (816.3) (388.5)
Other.................................................. (169.0) 562.8 216.6
---------- ---------- ----------
Net cash provided by financing activities...... 4,810.0 10,424.5 12,959.1
Effect of exchange rate changes on cash and cash
equivalents............................................ (4.1) 7.9 9.0
---------- ---------- ----------
Net change in cash and cash equivalents........ 1,237.9 1,094.7 (740.2)
Cash and cash equivalents, beginning of year............. 1,478.1 383.4 1,123.6
---------- ---------- ----------
Cash and cash equivalents, end of year................... $ 2,716.0 $ 1,478.1 $ 383.4
========== ========== ==========
Supplementary cash flow information
Interest paid.......................................... $ 5,207.7 $ 5,618.2 $ 4,232.3
Taxes (received)/paid.................................. (291.9) 169.6 433.9
The accompanying notes are an integral part of the financial statements.
FC-4
42
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Ford Motor
Credit Company and its majority owned domestic and foreign subsidiaries and
joint ventures ("Ford Credit"). Affiliates that are 20-50 percent owned are
included in the consolidated financial statements on an equity basis. Ford
Credit is an indirect wholly owned subsidiary of Ford Motor Company ("Ford").
Use of estimates as determined by management is required in the preparation of
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from these estimates and
assumptions. Certain amounts in prior years' financial statements have been
reclassified to conform with current year presentations.
NATURE OF OPERATIONS
Ford Credit operates in many locations around the world, the most
significant of which are the United States and Europe.
Ford Credit operates in two industry segments -- financing and insurance.
Financing operations primarily consist of: the purchase from franchised Ford
vehicle dealers of retail installment sale contracts and retail leases;
wholesale financing and capital loans to franchised Ford vehicle dealers and
other franchises associated with such dealers; loans to vehicle leasing
companies; and diversified financing. In addition, certain subsidiaries of Ford
Credit provide these financing services in the United States, Europe, Canada,
and Australia to other vehicle dealers. Insurance operations conducted through
Ford Credit's wholly owned subsidiary, The American Road Insurance Company
("TARIC"), operate in the United States and Canada and consist of: extended
service plan contracts for new and used vehicles manufactured by affiliated and
nonaffiliated companies, primarily originating from Ford dealers; physical
damage insurance covering vehicles and equipment financed at wholesale by Ford
Credit and its subsidiaries; and credit life and credit disability insurance for
retail purchasers of vehicles and equipment. See also Note 2 for information
regarding Ford Credit's ownership changes in TARIC.
REVENUE RECOGNITION
Revenue from finance receivables is recognized using the interest
(actuarial) method. Certain loan origination costs are deferred and amortized to
financing revenue over the life of the related loans using the interest method.
Rental revenue on operating leases is recognized on a straight-line basis over
the term of the lease. Initial direct costs, net of acquisition fees, related to
leases are deferred and amortized over the term of the lease. The accrual of
interest on loans is discontinued at the time a loan is determined to be
impaired. Subsequent amounts of interest collected are recognized in income only
if full recovery of the remaining principal is expected. Other amounts collected
are generally recognized first as a reduction of principal. Any remaining
amounts are treated as a recovery.
Agreements with Ford and other affiliates provide for interest supplements
and other support payments to Ford Credit on certain financing and leasing
transactions. These payments are recognized as income over the period that the
related finance receivables and leases are outstanding.
Insurance premiums are earned over the policy periods on bases related to
amounts at risk. Premiums from extended service plan contracts are earned over
the life of the policy based on historical loss experience. Physical damage
insurance premiums covering vehicles and equipment financed at wholesale by Ford
Credit and its finance subsidiaries are recognized as income on a monthly basis
as billed; other physical damage, credit life, and credit disability premiums
are earned over the life of the related policies, primarily on the sum-
of-the-digits basis. Certain costs of acquiring new business are deferred and
amortized over the terms of the related policies on the same basis on which
premiums are earned.
FC-5
43
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 1. ACCOUNTING POLICIES -- CONTINUED
SALE OF RECEIVABLES AND OPERATING LEASES
Ford Credit periodically sells finance receivables through special purpose
subsidiaries, retains the servicing rights, and is paid a servicing fee.
Estimated gains or losses from the sale of finance receivables are recognized in
the period in which the sale occurs. In determining the gain or loss on each
qualifying sale of finance receivables, the investment in the sold receivable
pool is allocated between the portion sold and the portion retained based on
their relative fair values at the date of sale (see Note 7).
Normal servicing fees are earned as collected over the remaining term of
the related sold finance receivables. The excess servicing asset is amortized
over the term of the sold receivables using the interest method.
Statement of Financial Accounting Standards No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," was issued in June 1996. SFAS 125 provides accounting and
reporting standards for the subject matter based on consistent application of a
financial components approach that focuses on control. The standard will be
adopted effective January 1, 1997 and is not expected to have any material
effect on the financial statements.
Ford Credit also periodically sells vehicles subject to operating leases to
special purpose subsidiaries under sale-leaseback arrangements. The leaseback
arrangements are structured as operating leases. Pursuant to these transactions,
the vehicles sold are removed from the balance sheet and any gain on sale is
deferred and amortized over the period of the leaseback arrangement. Ford Credit
continues to service the leases and is paid a servicing fee which is recognized
as received. Ford Credit also retains certain residual value and credit risk
which is considered in the calculation of the gain on sale.
DEPRECIATION
Depreciation expense on operating leases is provided on a straight-line
basis over the term of the lease in an amount necessary to reduce the leased
vehicle to its estimated residual value at the end of the lease term. Gains or
losses upon disposal and adjustments to reflect impairment of the vehicle's
residual value are also included in depreciation expense.
RESIDUAL VALUES
The Company has significant investments in the residual values of its
leasing portfolios. Residual values represent estimates of the value of the
assets at the end of the contract terms and are initially recorded based on
appraisals and estimates. Residual values are reviewed on a regular basis to
determine that recorded amounts are appropriate.
ALLOWANCE FOR CREDIT LOSSES
An allowance for estimated credit losses is established during the period
in which receivables or vehicles leased are acquired and is based on historical
experience and other factors that affect collectibility. The allowance for
estimated credit losses includes a provision for certain non-homogenous,
impaired loans. Finance receivables and lease investments are charged to the
allowance for credit losses when an account is deemed to be uncollectible,
taking into consideration the financial condition of the borrower or lessee, the
value of the collateral, recourse to guarantors and other factors. Collateral
held for resale included in other assets is carried at its estimated fair value
at the date of repossession net of estimated disposal costs. Recoveries on
finance receivables and lease investments previously charged off as
uncollectible are credited to the allowance for credit losses.
FC-6
44
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 1. ACCOUNTING POLICIES -- CONTINUED
INSURANCE LIABILITIES
A liability for reported insurance claims and an estimate of unreported
insurance claims is provided for based on past experience and is included in
other liabilities and deferred income.
DERIVATIVE FINANCIAL INSTRUMENTS
Ford Credit operates in many countries worldwide, and is exposed to market
risks, including the effects of changes in interest rates and changes in foreign
currency exchange rates. Ford Credit issues debt and other payables with various
maturity and interest rate structures to ensure funding over business and
economic cycles and to minimize overall borrowing costs. The maturity and
interest rate structures frequently differ from the invested assets. Exposures
to fluctuations in interest rates are created by the difference in maturities of
liabilities versus the maturities of assets. The financial exposures are
monitored and managed in accordance with Ford Credit's established policies and
procedures.
Ford Credit has entered into agreements to manage exposures to fluctuations
in interest rates and foreign exchange. These agreements are used to hedge
interest rate exposure and to hedge debt denominated in foreign currencies. All
such instruments are classified as "held for purposes other than trading";
company policy specifically prohibits the use of derivatives for speculative
purposes.
Interest rate swap agreements are used to manage the effects of interest
rate fluctuations by changing the interest rate characteristics of Ford Credit's
debt to match the interest rate characteristics of related assets. The
differential paid or received on interest rate swap agreements is recognized on
an accrual basis as an adjustment to interest expense. Gains and losses on
terminated interest rate swaps are amortized and reflected in interest expense
over the remaining term of the underlying debt.
Foreign currency swap agreements are used to manage foreign exchange
exposure. The differential paid or received on currency swaps is recognized on
an accrual basis as an adjustment to interest expense. Gains and losses on the
foreign currency swap agreements are recognized concurrently with foreign
currency translation gains and losses on the underlying debt.
FOREIGN CURRENCY TRANSLATION
Revenues, costs and expenses of foreign subsidiaries are translated to U.S.
dollars at average-period exchange rates. Assets and liabilities of foreign
subsidiaries are translated to U.S. dollars at year-end exchange rates with the
effects of these translation adjustments being reported in a separate component
of stockholder's equity. The change in this account results from translation
adjustments recorded during the year.
CASH EQUIVALENTS
Ford Credit considers investments purchased with a maturity of three months
or less to be cash equivalents.
FC-7
45
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. ACQUISITIONS AND DIVESTITURES
During 1996 and early 1997 the following actions were completed:
- In February 1996, Ford Credit exchanged substantially all of its
common stock interest in Ford Holdings, Inc. ("FHI") for a promissory note.
- In March 1996, TARIC was contributed to Ford Credit.
- During 1996, the majority of Ford Credit's diversified assets
managed by USL Capital Corporation was sold.
- In December 1996, Ford, FSG, Inc. ("FFSGI") contributed ownership of
Ford Credit Europe and Ford Credit Argentina to Ford Credit.
- In January 1997, Ford Credit sold its interest in Ford New Holland
Credit Company to FiatAllis North America, Inc. ("Fiat") and New Holland
(Canada) Credit Holding Ltd. ("Fiat Canada").
These actions are further discussed in the following sections.
INVESTMENT IN FHI
FHI is a holding company whose principal asset at December 31,1996 is an
equity investment in FFSGI. FFSGI is a holding company which owns substantially
all of Ford's financial services activities.
On February 28, 1996, FHI purchased substantially all of Ford Credit's
common stock interest in FHI for $2,949 million. FHI issued a promissory note to
Ford Credit for the purchase amount. The excess of the value received over the
book value of the FHI investment ($1,296.2 million) was credited to Ford
Credit's paid-in surplus. On April 2, 1996 and December 11, 1996, Ford Credit
received cash payments on the note of $1,032 million and $400 million,
respectively. The unpaid portion of the promissory note ($1,517 million at
December 31, 1996) is reflected as a reduction to stockholder's equity. Ford
Credit's investment in FHI at December 31, 1996 is $62.7 million. Prior to this
transaction, Ford Credit owned 45% of Ford Holdings' common stock and accounted
for its investment in FHI under the equity method. Ford owned the remaining
common stock in FHI representing 55% of the voting power.
Assuming the sale of Ford Credit's common stock interest in FHI had taken
place on January 1, 1995, Ford Credit's unaudited pro forma net income would
have been lower by approximately $27 million and $136 million in 1996 and 1995,
respectively. The pro forma results are not necessarily indicative of future
operating results or the results that might have occurred had the transaction
taken place on January 1, 1995.
FC-8
46
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. ACQUISITIONS AND DIVESTITURES -- CONTINUED
Condensed financial information of FHI as of December 31 and the two months
ended February 29, 1996 was as follows:
TWO MONTHS
ENDED
FEBRUARY 29, 1996 1995 1994
----------------- ---- ----
(IN MILLIONS)
INCOME STATEMENT
Revenue............................................... $350.4 $ 7,047.4 $ 5,880.5
Income before income taxes............................ 120.9 1,107.1 940.5
Net income............................................ 106.5 690.0 609.3
Preferred stock dividend requirements................. -- 129.8 97.5
Income available for common stockholders.............. 106.5 560.2 511.8
BALANCE SHEET
Assets
Cash and investments in securities................. $ 2,508.2 $ 5,947.0
Finance receivables, net........................... 1,478.3 29,361.7
Investment in Ford FSG, Inc........................ 3,390.0 --
Accounts receivable (including affiliated
companies) and other assets...................... 7,743.0 9,064.5
--------- ---------
Total assets..................................... $15,119.5 $44,373.2
========= =========
Liabilities
Accounts payable (including affiliated companies)
and other liabilities............................ $ 3,756.1 $ 5,537.8
Debt payable within one year....................... 2,248.0 16,054.9
Long-term debt..................................... 4,486.8 17,765.1
--------- ---------
Total liabilities................................ 10,490.9 39,357.8
Stockholders' equity.................................. 4,628.6 5,015.4
--------- ---------
Total liabilities and stockholders' equity....... $15,119.5 $44,373.2
========= =========
Ford Credit's equity in the net assets of Ford Holdings at December 31,
1995 and 1994 was $1,697 million and $1,342 million, respectively.
CONTRIBUTION OF TARIC
TARIC was contributed to Ford Credit on March 29, 1996. The transaction was
recorded by Ford Credit at TARIC's book value as a credit to paid-in surplus.
SALE OF DIVERSIFIED ASSETS
As a part of Ford's sale of USL Capital Corporation's assets during 1996,
the majority of Ford Credit's diversified assets (except leveraged leases)
managed by USL Capital Corporation was sold. The sale of the diversified assets
did not have a material impact on Ford Credit's 1996 financial statements. Also,
Ford Credit formed a partnership with Bank of America to manage a significant
portion of the leveraged lease portfolio and certain leveraged leases were
transferred to the partnership. Ford Credit accounts for its investment in the
partnership under the equity method.
FC-9
47
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. ACQUISITIONS AND DIVESTITURES -- CONTINUED
CONTRIBUTION OF FORD CREDIT EUROPE AND FORD CREDIT ARGENTINA
During the fourth quarter 1996, FFSGI contributed Ford Credit Europe
(approximately 78% ownership) and Ford Credit Argentina (substantially 100%
ownership) to Ford Credit. The transactions were recorded at book value. Prior
years' financial statements were restated to include Ford Credit Europe only.
Beginning retained earnings decreased by $36.2 million for 1994 due to this
restatement. The preferred stock of Ford Credit Europe is owned by Ford. The
contribution of Ford Credit Argentina was not material to Ford Credit's
financial statements and was recorded as a credit to paid-in surplus.
A reconciliation of revenue and net income is as follows:
1995 1994
---- ----
(IN MILLIONS)
Revenue (as previously reported)............................ $13,110.1 $10,389.3
Ford Credit Europe revenue.................................. 1,887.1 1,458.3
--------- ---------
Total revenue.......................................... $14,997.2 $11,847.6
========= =========
Net income (as previously reported)......................... $ 1,395.2 $ 1,312.7
Ford Credit Europe net income............................... 184.2 174.5
--------- ---------
Total net income....................................... $ 1,579.4 $ 1,487.2
========= =========
SALE OF FORD NEW HOLLAND CREDIT COMPANY
Ford Credit sold its 51% majority ownership of Ford New Holland Credit
Company to Fiat and Fiat Canada on January 24, 1997. The sale was effective
January 1, 1997 and is not expected to materially effect Ford Credit's financial
statements.
RECONCILIATION OF PAID-IN SURPLUS
Certain of the transactions outlined above were recorded in paid-in
surplus. A reconciliation follows:
PAID-IN
SURPLUS
-------
(IN MILLIONS)
Balance at January 1, 1995 (as previously stated)........... $ 917.3
Add:
Paid-in surplus for Ford Credit Europe.................... 987.2
--------
Balance at December 31, 1995 (as restated).................. $1,904.5
Add:
Excess of the value received over book value of FHI common
stock.................................................. 1,296.2
Contribution of TARIC..................................... 563.8
Other contributions (primarily Ford Credit Argentina)..... 35.7
Less:
Return of capital to parent company....................... (50.6)
--------
Balance at December 31, 1996................................ $3,749.6
========
FC-10
48
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 3. MARKETABLE AND OTHER SECURITIES
Available-for-sale securities are recorded at fair value with unrealized
gains and losses excluded from income and reported, net of tax, as a separate
component of stockholder's equity. At December 31, 1995, the amount reported in
stockholder's equity includes Ford Credit's equity interest in Ford Holdings'
investment portfolio. Held-to-maturity securities are recorded at amortized
cost. Equity securities which do not have readily determinable fair values are
recorded at cost. The basis of cost used in determining realized gains and
losses is specific identification.
The fair value of substantially all securities was estimated based on
quoted market prices for those securities. For securities for which there were
no quoted market prices, the estimate of fair value was based on similar types
of securities that are traded in the market.
Investments in securities at December 31, 1996 were as follows:
GROSS GROSS ESTIMATED MEMO:
AMORTIZED UNREALIZED UNREALIZED FAIR BOOK
COST GAINS LOSSES VALUE VALUE
--------- ---------- ---------- --------- -----
(IN MILLIONS)
Available-for-sale securities
Corporate debt securities................... $ 218.5 $ 1.5 $(1.2) $ 218.8 $ 218.8
Mortgage-backed securities.................. 207.1 1.7 (2.1) 206.7 206.7
Debt securities issued by the U.S.
government and agencies................... 154.3 1.3 (0.7) 154.9 154.9
Equity securities........................... 104.2 89.4 (3.4) 190.2 190.2
Debt securities issued by foreign
government................................ 26.0 0.9 -- 26.9 26.9
Municipal securities........................ 14.4 -- -- 14.4 14.4
-------- ----- ----- -------- --------
Total available-for-sale securities....... 724.5 94.8 (7.4) 811.9 811.9
-------- ----- ----- -------- --------
Held-to-maturity securities
Corporate debt securities................... 13.4 -- -- 13.4 13.4
Debt securities issued by U.S. government
and agencies.............................. 8.6 0.3 -- 8.9 8.6
-------- ----- ----- -------- --------
Total held-to-maturity securities......... 22.0 0.3 -- 22.3 22.0
-------- ----- ----- -------- --------
Total investments in securities with
readily determinable fair values....... 746.5 95.1 (7.4) 834.2 833.9
Other non-marketable equity securities...... 490.9 -- -- 490.9 490.9
-------- ----- ----- -------- --------
Total investments in securities........... $1,237.4 $95.1 $(7.4) $1,325.1 $1,324.8
======== ===== ===== ======== ========
FC-11
49
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 3. MARKETABLE AND OTHER SECURITIES -- CONTINUED
Investments in securities at December 31, 1995 were as follows:
GROSS GROSS ESTIMATED MEMO:
AMORTIZED UNREALIZED UNREALIZED FAIR BOOK
COST GAINS LOSSES VALUE VALUE
--------- ---------- ---------- --------- -----
(IN MILLIONS)
AVAILABLE-FOR-SALE SECURITIES
Debt securities issued by the U.S.
government and agencies................... $ 9.3 $ 0.1 $ -- $ 9.4 $ 9.4
HELD-TO-MATURITY SECURITIES
Municipal securities........................ 1,041.6 57.6 -- 1,099.2 1,041.6
Corporate debt securities................... 47.9 1.8 -- 49.7 47.9
-------- ----- ----- -------- --------
Total held-to-maturity securities...... 1,089.5 59.4 -- 1,148.9 1,089.5
-------- ----- ----- -------- --------
Total investments in securities with
readily determinable fair values..... 1,098.8 59.5 -- 1,158.3 1,098.9
Other non-marketable equity securities...... 815.4 -- -- 815.4 815.4
-------- ----- ----- -------- --------
Total investments in securities........ $1,914.2 $59.5 $ -- $1,973.7 $1,914.3
======== ===== ===== ======== ========
The amortized cost and fair value of investments in available-for-sale
securities and held-to-maturity securities at December 31, 1996, by contractual
maturity, were as follows:
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------------ -----------------------------
ESTIMATED MEMO: ESTIMATED MEMO:
AMORTIZED FAIR BOOK AMORTIZED FAIR BOOK
COST VALUE VALUE COST VALUE VALUE
--------- --------- ----- --------- --------- -----
(IN MILLIONS)
Due in one year or less................ $ 4.4 $ 4.4 $ 4.4 $ 5.8 $ 5.8 $ 5.8
Due after one year through five
years................................ 182.7 184.3 184.3 13.9 14.0 13.9
Due after five years through ten
years................................ 162.7 162.3 162.3 0.6 0.7 0.6
Due after ten years.................... 63.4 64.0 64.0 1.7 1.8 1.7
Mortgage-backed-securities............. 207.1 206.7 206.7 -- -- --
Equity securities...................... 104.2 190.2 190.2 -- -- --
------ ------ ------ ----- ----- -----
Total............................. $724.5 $811.9 $811.9 $22.0 $22.3 $22.0
====== ====== ====== ===== ===== =====
Proceeds from sales of available-for-sale securities were $4.5 billion and
$76.4 million in 1996 and 1995, respectively. The increase in activity in 1996
was related to the contribution of TARIC to Ford Credit (see Note 2). TARIC
purchases and sells securities in the normal course of business. Gross realized
gains and losses for the years 1996 and 1995 were not material.
FC-12
50
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 4. FINANCE RECEIVABLES
Net finance receivables at December 31 were as follows:
1996 1995
---- ----
(IN MILLIONS)
Retail...................................................... $53,099.1 $47,688.7
Wholesale................................................... 22,706.3 22,122.7
Diversified................................................. 515.3 2,241.6
Other....................................................... 5,427.4 5,111.2
--------- ---------
Total finance receivables, net of unearned income.... 81,748.1 77,164.2
Less: Allowance for credit losses................. (900.1) (787.5)
--------- ---------
Finance receivables, net........................ $80,848.0 $76,376.7
========= =========
Included in finance receivables is a total of $1.2 billion owed by three
customers with the largest receivable balances. During 1996 and 1995, Ford
Credit issued irrevocable standby letters of credit in the amount of $234
million and $267 million, respectively, on behalf of one of these customers. A
major portion of these amounts are guaranteed by Ford.
Ford Credit periodically sells finance receivables under agreements which
contain recourse provisions. Reserves for estimated losses under the recourse
provisions are separately provided based principally on historical loss
experience. Ford Credit continues to service the sold receivables for a fee.
Ford Credit's servicing portfolio relating to these finance receivables sales
amounted to $8.9 billion and $9.2 billion at December 31, 1996 and 1995,
respectively.
The contractual maturities of total finance receivables net of unearned
income outstanding at December 31, 1996 were as follows:
DUE IN YEAR ENDING DECEMBER 31
--------------------------------- DUE AFTER
1997 1998 1999 1999 TOTAL
---- ---- ---- --------- -----
(IN MILLIONS)
Retail.................................. $20,077.2 $14,845.3 $ 9,669.7 $ 8,506.8 $53,099.0
Wholesale............................... 22,284.9 198.0 213.9 9.5 22,706.3
Diversified............................. 62.6 51.3 34.3 367.2 515.4
Other................................... 3,680.0 113.1 106.3 1,528.0 5,427.4
--------- --------- --------- --------- ---------
Total............................ $46,104.7 $15,207.7 $10,024.2 $10,411.5 $81,748.1
========= ========= ========= ========= =========
It is Ford Credit's experience that a substantial portion of finance
receivables are repaid before contractual maturity dates. The above table,
therefore, is not to be regarded as a forecast of future cash collections.
FC-13
51
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 4. FINANCE RECEIVABLES -- CONTINUED
Installments, including interest, past-due 60 days or more and the
aggregate receivable balances related to such past-due installments were as
follows:
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- -----------------------
INSTALLMENTS BALANCES INSTALLMENTS BALANCES
------------ -------- ------------ --------
(IN MILLIONS)
Retail................................................ $283.2 $806.4 $178.0 $457.6
Wholesale............................................. 12.1 53.3 22.1 26.6
Diversified........................................... 0.1 0.2 -- 0.2
Other................................................. 21.6 86.0 11.1 44.6
------ ------ ------ ------
Total............................................ $317.0 $945.9 $211.2 $529.0
====== ====== ====== ======
Included in retail and diversified receivables are investments in direct
financing and leveraged leases related to the leasing of motor vehicles and
various types of transportation and other equipment:
1996 1995
---- ----
(IN MILLIONS)
Net investment in direct financing leases
Minimum lease rentals..................................... $2,307.5 $2,079.8
Estimated residual values................................. 2,618.4 3,540.5
Less: Allowance for credit losses...................... (37.6) (35.5)
-------- --------
Net investment in direct financing leases............ $4,888.3 $5,584.8
======== ========
Minimum direct financing lease rentals (including executory costs of $25.5
million) for each of the five succeeding years are as follows (in millions):
1997 -- $2,509.4; 1998 -- $1,449.0; 1999 -- $695.2; 2000 -- $258.4; 2001 --
$39.3; thereafter -- $0.1.
1996 1995
---- ----
(IN MILLIONS)
Investment in leveraged leases
Rentals receivable (net of principal and interest on
nonrecourse debt)...................................... $200.5 $1,097.1
Estimated residual values................................. 28.2 564.6
Less: Allowance for credit losses...................... (2.7) (19.2)
------ --------
Investment in leveraged leases................... $226.0 $1,642.5
====== ========
Deferred income tax liabilities arising from leveraged leases were $190.5
million and $1,490.1 million at December 31, 1996 and 1995, respectively.
See Note 2 regarding the partial sale of Ford Credit's diversified assets
and the formation of a partnership with Bank of America to manage a significant
portion of the leveraged lease portfolio in 1996.
FC-14
52
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 5. NET INVESTMENT, OPERATING LEASES
Operating leases at December 31 were as follows:
1996 1995
---- ----
(IN MILLIONS)
Investment in operating leases
Vehicles, at cost......................................... $36,951.2 $31,848.7
Lease origination costs................................... 60.1 44.9
Less: Accumulated depreciation......................... (6,048.6) (5,946.0)
Allowance for credit losses...................... (317.5) (267.4)
--------- ---------
Net investment in operating leases......... $30,645.2 $25,680.2
========= =========
Future minimum rentals on operating leases are as follows (in millions):
1997 -- $10,872.8; 1998 -- $10,202.7; 1999 -- $997.5; 2000 -- $154.2.
Ford Credit periodically sells vehicles subject to operating leases to
special purpose subsidiaries under sale-leaseback arrangements. The leaseback
arrangements are structured as operating leases. Ford Credit continues to
service the leases and is paid a service fee which is recognized as received.
Ford Credit also retains certain limited residual value and credit risk which is
considered in the calculation of the gain on sale. Ford Credit's servicing
portfolio related to these sales amounted to $1,388.7 million and $659.5 million
at December 31, 1996 and 1995, respectively.
NOTE 6. ALLOWANCE FOR CREDIT LOSSES
Following is an analysis of the allowance for credit losses relating to
finance receivables and operating leases for the past three years:
1996 1995 1994
---- ---- ----
(IN MILLIONS)
Balance, beginning of year.................................. $1,054.9 $1,084.4 $1,005.1
Additions................................................. 993.3 480.4 293.9
Deductions
Losses................................................. 1,020.7 686.6 443.6
Recoveries............................................. (190.7) (200.7) (220.5)
-------- -------- --------
Net losses........................................... 830.0 485.9 223.1
Other changes, principally amounts relating to finance
receivables and operating leases sold.................. 0.6 24.0 (8.5)
-------- -------- --------
Net deductions....................................... 830.6 509.9 214.6
-------- -------- --------
Balance, end of year........................................ $1,217.6 $1,054.9 $1,084.4
======== ======== ========
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan," was issued in May 1993 and amended in
October 1994 by Statement of Financial Accounting Standards No. 118, "Accounting
by Creditors for Impairment of a Loan -- Income Recognition and Disclosures."
The Standards apply to loans individually evaluated and do not apply to small
dollar homogeneous loans, such as retail finance receivables, which are
evaluated collectively based on historical experience. The Standards require
that impaired loans be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate. The Company adopted
these standards as of January 1, 1995 and the effect was not material.
FC-15
53
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 7. OTHER ASSETS
Other assets consist of:
DECEMBER 31
---------------------
1996 1995
---- ----
(IN MILLIONS)
Investment in leasing partnership........................... $1,451.5 $ --
Investment in used vehicles held for resale, at estimated
fair value................................................ 1,145.1 1,199.3
Retained interest in sold receivables....................... 1,124.1 1,149.2
Deferred charges and other assets........................... 706.6 572.3
Collateral held for resale.................................. 407.6 348.8
Property and equipment, net of accumulated depreciation of
$103.5 in 1996 and $95.2 in 1995.......................... 150.1 135.6
--------- ---------
Total.................................................. $4,985.0 $3,405.2
========= =========
NOTE 8. DEBT
Debt at December 31 was as follows:
WEIGHTED
AVERAGE(A)
INTEREST RATES BOOK VALUE
---------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
(IN MILLIONS)
PAYABLE WITHIN ONE YEAR
Commercial paper(B).................................. $38,228.3 $40,089.8
Other short-term debt(C)............................. 4,788.7 2,110.3
--------- ---------
Total short-term debt........................ 5.52% 5.86% 43,017.0 42,200.1
Senior notes payable within one year(D)(F)........... 6.49% 7.58% 9,178.0 7,335.6
--------- ---------
Total payable within one year................ 5.69% 6.11% 52,195.0 49,535.7
--------- ---------
PAYABLE AFTER ONE YEAR
Secured indebtedness................................. 17.64% -- 9.9 --
Unsecured senior indebtedness
Notes(E).......................................... 6.63% 6.85% 44,273.6 41,152.6
Debentures........................................ 4.56% 5.60% 1,228.3 1,160.9
Unamortized (discount)/premium.................... (7.5) 6.1
--------- ---------
Total secured and unsecured senior
indebtedness............................... 45,504.3 42,319.6
Unsecured long-term subordinated notes................. 6.15% 6.23% 325.0 325.0
--------- ---------
Total payable after one year(F).............. 45,829.3 42,644.6
--------- ---------
Total debt................................... 6.12% 6.43% $98,024.3 $92,180.3
========= =========
- -------------------------
(A) Excludes the effect of interest rate swap agreements.
(B) The average remaining maturities of commercial paper was 34 days at
December 31, 1996 and 32 days at December 31, 1995.
(C) Includes $2,477.7 million and $176.3 million with affiliated companies at
December 31, 1996 and 1995, respectively.
FC-16
54
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 8. DEBT -- CONTINUED
(D) Includes $653 million and $0 million with an affiliated company at December
31, 1996 and 1995, respectively.
(E) Includes $3,584.4 million and $1,174.4 million with affiliated companies at
December 31, 1996 and 1995, respectively.
(F) Secured and unsecured senior notes and debentures mature at various dates
through 2048. Maturities for the next five years are as follows (in
millions): 1997 -- $9,178.0; 1998 -- $9,843.2; 1999 -- $9,429.0;
2000 -- $8,539.0; 2001 -- $7,694.8; thereafter -- $10,330.8.
1996 1995
---- ----
(IN MILLIONS)
PAYABLE AFTER ONE YEAR(A)
Fixed interest rates...................................... $31,254.7 $28,337.2
Variable interest rates (generally based on LIBOR or other
short-term rates)...................................... 14,574.6 14,307.4
--------- ---------
Total payable after one year........................... $45,829.3 $42,644.6
========= =========
- -------------------------
(A) Excludes the effect of interest rate swap agreements.
Ford Credit and certain of its subsidiaries have entered into interest rate
swap agreements to manage exposures to fluctuations in interest rates. The
agreements decreased the overall weighted-average interest rate on total debt
from 6.12% to 6.08% as of December 31, 1996 and increased the overall
weighted-average interest rate on total debt from 6.43% to 6.57% as of December
31, 1995. In addition, the agreements increased the Company's overall
weighted-average effective interest rates for full year 1996 from 6.42% to 6.43%
and decreased full year 1995 from 6.99% to 6.87%. The agreements decreased the
long-term obligations payable after one year subject to variable interest rates
as of December 31, 1996 and 1995 to $13,627.5 and $12,221.4 million,
respectively. The effect of these agreements is to reduce the effect of interest
rate changes on profitability. Approximately 32% of Ford Credit's interest rate
swaps mature in 1997 and approximately 88% mature by 2001.
FC-17
55
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 8. DEBT -- CONTINUED
Debt at December 31 included obligations payable in foreign currencies and
translated to U.S. dollars as follows:
DECEMBER 31
----------------------
1996 1995
---- ----
(IN MILLIONS)
Canadian dollar............................................. $ 4,518.2 $ 4,099.8
German mark................................................. 3,621.6 3,662.4
Japanese yen................................................ 2,903.2 1,726.4
British pound............................................... 2,380.5 2,072.7
Australian dollar........................................... 1,710.5 1,416.8
French franc................................................ 1,175.5 757.9
Italian lira................................................ 867.0 771.7
Spanish peseta.............................................. 846.9 770.5
Netherland guilder.......................................... 304.9 305.3
Norwegian krone............................................. 283.9 234.3
Swedish krona............................................... 282.1 136.0
New Zealand dollar.......................................... 237.4 --
Danish krone................................................ 228.2 203.0
Austrian schilling.......................................... 216.8 164.5
Mexican peso................................................ 209.5 116.8
Belgian franc............................................... 183.6 201.0
Swiss franc................................................. 169.5 280.0
Portuguese escudo........................................... 163.1 95.0
Finnish markka.............................................. 145.3 79.2
Irish punt.................................................. 140.0 105.9
Argentina peso.............................................. 126.1 --
Indonesian rupiah........................................... 63.4 32.3
Luxembourg franc............................................ 63.1 68.0
Grecian drachma............................................. 30.5 4.8
Polish zloty................................................ 18.6 --
European currency unit...................................... -- 160.2
--------- ---------
$20,889.4 $17,464.5
========= =========
Certain of these obligations are denominated in currencies other than the
currency of the country of the issuer. Foreign currency swap agreements are used
to hedge exposure to changes in exchange rates of certain of these obligations.
These obligations are translated to U.S. dollars in the financial statements at
the year-end rates of exchange.
NOTE 9. SUPPORT FACILITIES
Support facilities represent additional sources of funds, if required. At
December 31, 1996, Ford Credit had approximately $19.6 billion of contractually
committed facilities. In addition, $7.6 billion of Ford bank lines may be used
by Ford Credit at Ford's option. The lines have various maturity dates through
June 30, 2001 and may be used, at Ford Credit's option, by any of its direct or
indirect majority-owned subsidiaries. Any such borrowing will be guaranteed by
Ford Credit.
Additionally, at December 31, 1996, there was approximately $4.9 billion of
contractually committed facilities available for Ford Credit Europe plc's use.
In addition, $775 million of Ford bank lines may be used
FC-18
56
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 9. SUPPORT FACILITIES -- CONTINUED
by Ford Credit Europe plc at Ford's option. The lines have various maturity
dates through June 30, 2001 and may be used, at Ford Credit Europe plc's option,
by any of its direct or indirect majority-owned subsidiaries. Any such borrowing
will be guaranteed by Ford Credit Europe plc.
NOTE 10. INCOME TAXES
Ford Credit and certain of its domestic subsidiaries join Ford in filing
consolidated United States federal and state income tax returns. Pursuant to an
arrangement with Ford, United States income tax liabilities or credits are
allocated to Ford Credit in accordance with the contribution of Ford Credit and
its subsidiaries to Ford's consolidated tax position.
The provision for income taxes was estimated as follows:
1996 1995 1994
---- ---- ----
(IN MILLIONS)
Currently (refundable)/payable
U.S. federal.............................................. $ (501.7) $(45.0) $286.4
Foreign................................................... 138.1 196.9 114.5
State and local........................................... (10.4) (29.7) 1.5
-------- ------ ------
Total currently (refundable)/payable................... (374.0) 122.2 402.4
Deferred tax liability/(benefit)
U.S. federal.............................................. 1,050.3 490.0 327.9
Foreign................................................... 56.2 (22.1) 34.1
State and local........................................... (0.9) 92.8 24.6
-------- ------ ------
Total deferred......................................... 1,105.6 560.7 386.6
-------- ------ ------
Total provision........................................ $ 731.6 $682.9 $789.0
======== ====== ======
A reconciliation of the provision for income taxes as a percentage of
income before income taxes, excluding equity in net income of affiliated
companies and minority interest in net income of a joint venture with the United
States statutory tax rate for the last three years is shown below:
1996 1995 1994
---- ---- ----
U.S. statutory tax rate..................................... 35.0% 35.0% 35.0%
Effect of (in percentage points)
State and local income taxes.............................. 1.5 2.0 2.0
U.S. taxes attributable to foreign source income.......... 1.5 (1.9) 1.6
Investment income not subject to tax or subject to tax at
reduced rates.......................................... (0.9) (1.3) (0.9)
Rate adjustments on deferred taxes........................ (1.9) -- (1.4)
Other..................................................... (1.4) (0.6) 1.4
---- ---- ----
Effective tax rate..................................... 33.8% 33.2% 37.7%
==== ==== ====
FC-19
57
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 10. INCOME TAXES -- CONTINUED
Deferred income taxes reflect the estimated tax effect of temporary
differences between assets and liabilities for financial reporting purposes and
those amounts as measured by tax laws and regulations. The components of
deferred income tax assets and liabilities as of December 31 were as follows:
1996 1995
---- ----
(IN MILLIONS)
DEFERRED TAX LIABILITIES
Leasing transactions........................................ $4,536.0 $3,470.8
Purchased tax benefits...................................... 294.1 298.9
Loan origination costs...................................... 125.0 97.7
Sales of receivables........................................ 105.2 81.8
Other....................................................... 104.8 114.5
-------- --------
Total deferred tax liabilities............................ 5,165.1 4,063.7
DEFERRED TAX ASSETS
Provision for credit losses................................. 662.6 456.7
Employee benefit plans...................................... 113.6 109.5
Retail contract earnings method............................. 48.5 49.4
Alternative minimum tax..................................... 46.0 289.9
Other....................................................... 34.0 48.4
-------- --------
Total deferred tax assets................................. 904.7 953.9
-------- --------
Net deferred tax liabilities........................... $4,260.4 $3,109.8
======== ========
NOTE 11. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
Ford Credit and certain of its subsidiaries provide selected health care
and life insurance benefits for retired employees under unfunded plans sponsored
by Ford and certain of its subsidiaries. Ford Credit's U.S. and Canadian
employees may become eligible for those benefits if they retire while working
for Ford Credit; however, benefits and eligibility rules may be modified from
time to time. The estimated cost for postretirement health care benefits is
accrued on an actuarially determined basis.
Net postretirement benefit expense included the following:
1996 1995
---- ----
(IN MILLIONS)
Benefits attributed to employees' service................... $ 8.3 $ 7.3
Interest on accumulated benefit obligation.................. 14.4 13.1
Net amortization/other...................................... (1.7) --
-------- --------
Net postretirement benefit expense........................ $21.0 $20.4
======== ========
Retiree benefit payments.................................... $ 4.7 $ 3.4
FC-20
58
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 11. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS -- CONTINUED
The status of these plans, reconciled with the amounts recognized in Ford
Credit's balance sheet at December 31, was as follows:
1996 1995
---- ----
(IN MILLIONS)
Accumulated Postretirement Benefit Obligation
Retirees.................................................... $ 60.6 $ 57.0
Active employees eligible to retire......................... 29.5 26.7
Other active employees...................................... 120.6 137.8
------ ------
Total accumulated obligation.............................. 210.7 221.5
Unamortized amendments...................................... 1.2 2.0
Unamortized net gain........................................ 32.1 3.9
------ ------
Accrued liability......................................... $244.0 $227.4
====== ======
Assumptions:
Discount rate at year-end................................. 7.5% 7.25%
Present health care cost trend rate....................... 6.6% 9.5%
Ultimate trend rate in ten years.......................... 5.0% 5.5%
Weighted-average trend rate............................... 5.7% 6.6%
Changing the assumed health care cost trend rates by one percentage point
would change the aggregate service and interest cost components of net periodic
postretirement benefit cost for 1996 by $4.0 million and the accumulated
postretirement benefit obligation at December 31, 1996 by $34.0 million.
NOTE 12. TRANSACTIONS WITH AFFILIATED COMPANIES
An agreement with Ford provides for payments by Ford to Ford Credit that
would maintain Ford Credit's consolidated income before income taxes and net
income at specified minimum levels. No payments were required under the
agreement during 1996, 1995, or 1994.
Ford Credit and its subsidiaries, from time to time, purchase accounts
receivable of certain divisions and subsidiaries of Ford. The amount of such
receivables outstanding was $4,043.4 million at December 31, 1996 and $3,523.0
million at December 31, 1995. Agreements with Ford and other affiliates also
provide for payments to Ford Credit for interest supplements and other support
costs on certain financing and leasing transactions. Amounts included in the
income statement for these and other transactions with Ford were as follows (in
millions): 1996 -- $1,432.7; 1995 -- $1,279.0; 1994 -- $890.1. Ford Credit and
its subsidiaries purchase from Ford and affiliates certain vehicles which were
previously acquired by Ford principally from its fleet and rental car customers.
The fair value of these vehicles held for resale and included in other assets at
December 31 was as follows (in millions): 1996 -- $789.2; 1995 -- $660.7. Ford
Credit also has entered into a sale/leaseback agreement with Ford for vehicles
leased to employees of Ford and its subsidiaries. The net investment in these
vehicles included in operating leases at December 31 was as follows (in
millions): 1996 -- $764.4; 1995 -- $743.8.
Investments in securities include preferred stock of an affiliate ($485.9
million) which was acquired from Ford. Investments in these securities are
recorded at cost. Ford has provided Ford Credit with certain guarantees related
to Ford Credit's investment and return on investment in this preferred stock.
Amounts related to these transactions included in investment and other income
were as follows (in millions): 1996 -- $28.7; 1995 -- $40.7; 1994 -- $32.4.
FC-21
59
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 12. TRANSACTIONS WITH AFFILIATED COMPANIES -- CONTINUED
On June 28, 1996, Ford Credit transferred Budget Rent-a-Car Corporation
("BRAC") preferred stock to FFSGI as a dividend. Also, Ford Credit recorded a
$498 million reserve for a portion of the BRAC receivables and recorded a
corresponding receivable from FFSGI, the guarantor of the receivables. Payment
was received from FFSGI for this amount on July 11, 1996. Amounts included in
investment and other income from dividends and interest were as follows (in
millions): 1996 -- $85.8; 1995 -- $109.4; 1994 -- $82.3. In January 1997, Ford
announced an agreement to sell its ownership of BRAC to Team Rental Group, Inc.
Based on this agreement Ford Credit will recover approximately $344 million of
the amount previously reserved which will be refunded to FFSGI.
On February 28, 1996, FHI issued a promissory note to Ford Credit for
substantially all of Ford Credit's common stock interest in FHI. Interest income
earned on the promissory note was $93.5 million in 1996.
Ford Credit and its subsidiaries receive technical and administrative
advice and services from Ford and its subsidiaries, occupy office space
furnished by Ford and its subsidiaries and utilize data processing facilities
maintained by Ford. Payments to Ford and its subsidiaries for such advice and
services are charged to operating expenses and were as follows (in millions):
1996 -- $111.4; 1995 -- $95.2; 1994 -- $87.2.
Retirement benefits are provided under defined benefit plans for employees
of Ford Credit and its subsidiaries in the United States by the Ford General
Retirement Plan and for employees of the foreign subsidiaries in Europe,
Australia and Canada by the respective Ford retirement plans. Employee
retirement plan costs allocated to Ford Credit and its subsidiaries from Ford
and charged to operating expenses were as follows (in millions): 1996 -- $16.6;
1995 -- $15.9; 1994 -- $13.7.
See other notes for additional information regarding transactions with
affiliated companies.
NOTE 13. LITIGATION AND CLAIMS
Various legal actions, governmental proceedings and other claims are
pending or may be instituted or asserted in the future against Ford Credit and
its subsidiaries. Certain of the pending legal actions are, or purport to be,
class actions. Some of these matters involve or may involve compensatory,
punitive or antitrust or other treble damage claims in very significant amounts
or other relief which, if granted, would require very significant expenditures.
Litigation is subject to many uncertainties, the outcome of individual
litigated matters is not predictable with assurance and it is reasonably
possible that some of the foregoing matters could be decided unfavorably to Ford
Credit or the subsidiary involved. Although the amount of liability at December
31, 1996 with respect to these matters cannot be ascertained, Ford Credit
believes that any resulting liability should not materially affect the
consolidated financial position or results of operations of Ford Credit and its
subsidiaries.
FC-22
60
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 14. FINANCIAL INSTRUMENTS
BOOK AND ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments held by Ford Credit and
its subsidiaries at December 31, and the valuation techniques used to estimate
the fair value, were as follows:
1996 1995
--------------------- ---------------------
ESTIMATED ESTIMATED
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
----- --------- ----- ---------
(IN MILLIONS)
ASSETS
Cash and cash equivalents......................... $ 2,716.0 $ 2,716.0 $ 1,478.1 $ 1,478.1
Investments in securities......................... 1,324.8 1,325.1 1,914.3 1,973.7
Finance receivables, net.......................... 75,611.4 74,942.6 69,884.2 69,299.4
Retained interests in sold receivables............ 1,124.1 1,124.1 1,149.2 1,149.2
LIABILITIES
Debt payable within one year...................... $52,195.0 $52,195.0 $49,535.7 $49,535.7
Debt payable after one year....................... 45,829.3 45,563.4 42,644.6 43,860.4
Derivative Contracts:
Foreign exchange instruments
Contracts with unrealized gains.............. 80.1 68.5 17.2 218.1
Contracts with unrealized losses............. (428.3) (722.8) (127.9) (162.4)
Interest rate instruments
Contracts with unrealized gains.............. 250.2 433.7 63.0 732.8
Contracts with unrealized losses............. (123.1) (285.5) (61.1) (339.7)
Cash and Cash Equivalents. The book value approximates fair value because
of the short maturity of these instruments.
Investments in Securities. The estimated fair value of investments in
marketable equity and debt securities are estimated based on market prices. Book
value of investments in non-marketable equity securities approximate fair value
(See Note 3.).
Finance Receivables, Net. The fair value of substantially all finance
receivables is estimated by discounting future cash flows using an estimated
discount rate which reflects the current credit, interest rate and prepayment
risks associated with similar types of instruments. For receivables with short
maturities, the book values approximate fair values. Finance receivables
excluded from fair market valuation include direct financing and leveraged lease
investments.
Retained Interests in Sold Receivables. Included in other assets is the
retained interest in sold finance receivables and related amounts. These amounts
are recorded at the present value of estimated future cash flows discounted at
rates commensurate with this type of instrument, which approximates fair value.
Debt Payable Within One Year. The book value approximates fair value
because of the short maturity of these instruments.
Debt Payable After One Year. The fair value is estimated based on quoted
market prices or current rates for similar debt with the same remaining
maturities.
FC-23
61
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 14. FINANCIAL INSTRUMENTS -- CONTINUED
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The following sections describe the various off-balance-sheet financial
instruments that Ford Credit and its subsidiaries held as of December 31, 1996
and 1995. Also included is a brief discussion of the estimated fair value of
those contracts and certain risks associated with holding those contracts
through maturity.
Foreign Exchange Instruments. Ford Credit and certain of its subsidiaries
have entered into foreign currency swap agreements to manage exposure to foreign
exchange rate fluctuations. At December 31, 1996 and 1995, the total notional
amount of Ford Credit's foreign exchange instruments outstanding was $10.6
billion and $8.4 billion, respectively. These exchange agreements hedge
principal and interest payments on debt that are denominated in foreign
currencies. The book value of the foreign currency swap agreements represents
the amount payable to the counterparty since the last settlement date. The fair
value of these foreign exchange agreements was estimated using current market
rates.
Interest Rate Instruments. Ford Credit and certain of its subsidiaries have
entered into interest rate swap agreements to manage exposure to fluctuations in
interest rates. The underlying notional amount of interest rate swaps was $74.1
billion at December 31, 1996 and $61.7 billion at December 31, 1995,
respectively.
The differential paid or received on interest rate swap agreements is
recognized on an accrual basis as an adjustment to interest expense. The book
value of an interest rate swap agreement represents the differential receivable
or payable with a swap counterparty since the last settlement date.
The fair value of an interest rate swap is the estimated amount Ford Credit
would receive or pay to terminate the agreement. The fair value is calculated
using current market rates for similar instruments with the same remaining
maturities. Unrealized gains and losses are netted for individual counterparties
where legally permissible.
COUNTERPARTY CREDIT RISK
Ford Credit manages its foreign currency and interest rate counterparty
credit risks by limiting exposure and by monitoring the financial condition of
counterparties. The amount of exposure Ford Credit may have to a single
counterparty on a worldwide basis is limited by company policy. In the unlikely
event that a counterparty fails to meet the terms of a foreign currency or an
interest rate instrument, risk is limited to the fair value of the instrument.
CONCENTRATIONS OF CREDIT RISK
Ford Credit controls its credit risk through credit standards, limits on
exposure and by monitoring the financial condition of other parties. The
majority of Ford Credit's finance receivables are geographically diversified
throughout the United States. Foreign finance receivables are concentrated in
Europe, Canada, and Australia.
FC-24
62
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 15. SEGMENT INFORMATION
Total revenue, income before income taxes and assets identifiable with
United States, Europe, and other foreign operations were as follows:
1996 1995 1994
---- ---- ----
(IN MILLIONS)
Total revenue
United States operations................................ $ 13,175.9 $ 12,056.2 $ 9,624.1
European operations..................................... 2,137.2 1,887.1 1,458.3
Other foreign operations................................ 1,301.6 1,053.9 765.2
---------- ---------- ---------
Total revenue...................................... $ 16,614.7 $ 14,997.2 $11,847.6
========== ========== =========
Income before income taxes
United States operations................................ $ 1,677.8 $ 1,634.0 $ 1,689.1
European operations..................................... 358.1 382.5 336.4
Other foreign operations................................ 149.0 55.9 77.5
Equity in net income of affiliated companies............ 55.3 255.4 232.5
---------- ---------- ---------
Total income before income taxes................... $ 2,240.2 $ 2,327.8 $ 2,335.5
========== ========== =========
Assets at December 31
United States operations................................ $ 93,726.9 $ 85,698.1 $76,310.5
European operations..................................... 18,743.9 16,688.7 13,525.9
Other foreign operations................................ 9,181.2 7,140.6 5,567.5
Equity in net assets of affiliated companies............ 44.4 1,730.5 1,349.3
---------- ---------- ---------
Total assets....................................... $121,696.4 $111,257.9 $96,753.2
========== ========== =========
NOTE 16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial data by calendar quarter for the past two years were as
follows:
TOTAL INTEREST DEPRECIATION ON PROVISION FOR NET
REVENUE EXPENSE OPERATING LEASES CREDIT LOSSES INCOME
------- -------- ---------------- ------------- ------
(IN MILLIONS)
1996
First Quarter..................... $ 3,932.5 $1,546.7 $1,377.4 $203.5 $ 339.0
Second Quarter.................... 4,142.6 1,569.8 1,337.6 196.9 376.0
Third Quarter..................... 4,183.7 1,529.3 1,403.5 300.4 340.9
Fourth Quarter.................... 4,355.9 1,578.4 1,419.1 292.5 384.7
--------- -------- -------- ------ --------
Full Year...................... $16,614.7 $6,224.2 $5,537.6 $993.3 $1,440.6
========= ======== ======== ====== ========
1995
First Quarter..................... $ 3,484.5 $1,348.1 $1,249.7 $ 84.0 $ 334.0
Second Quarter.................... 3,707.4 1,467.3 1,293.9 96.6 387.9
Third Quarter..................... 3,836.2 1,570.3 1,341.3 140.0 402.5
Fourth Quarter.................... 3,969.1 1,612.6 1,350.2 159.8 455.0
--------- -------- -------- ------ --------
Full Year...................... $14,997.2 $5,998.3 $5,235.1 $480.4 $1,579.4
========= ======== ======== ====== ========
FC-25
63
EXHIBIT INDEX
DESIGNATION DESCRIPTION
- ----------- -----------
Exhibit 3-A* Restated Certificate of Incorporation of Ford Motor Credit
Company.
Exhibit 3-B* By-Laws of Ford Motor Credit Company as amended through
March 2, 1988.
Exhibit 4-A* Form of Indenture dated as of August 1, 1984 between Ford
Motor Credit Company and The Chase Manhattan Bank (National
Association) relating to Debt Securities.
Exhibit 4-A-1* Form of First Supplemental Indenture dated August 15, 1986
between Ford Motor Credit Company and The Chase Manhattan
Bank (National Association) supplementing the Indenture
designated as Exhibit 4-A.
Exhibit 4-A-2* Form of Second Supplemental Indenture dated as of October
15, 1986 between Ford Motor Credit Company and The Chase
Manhattan Bank (National Association) supplementing the
Indenture designated as Exhibit 4-A.
Exhibit 4-B* Form of Indenture dated as of February 1, 1985 between Ford
Motor Credit Company and Manufacturers Hanover Trust Company
relating to Debt Securities.
Exhibit 4-B-1* Form of First Supplemental Indenture dated as of April 1,
1986 between Ford Motor Credit Company and Manufacturers
Hanover Trust Company supplementing the Indenture designated
as Exhibit 4-B.
Exhibit 4-B-2* Form of Second Supplemental Indenture dated as of September
1, 1986 between Ford Motor Credit Company and Manufacturers
Hanover Trust Company supplementing Indenture designated as
Exhibit 4-B.
Exhibit 4-B-3* Form of Third Supplemental Indenture dated as of March 15,
1987 between Ford Motor Credit Company and Manufacturers
Hanover Trust Company supplementing the Indenture designated
as Exhibit 4-B.
Exhibit 4-B-4* Form of Fourth Supplemental Indenture dated as of April 15,
1988 between Ford Motor Credit Company and Manufacturers
Hanover Trust Company supplementing the Indenture designated
as Exhibit 4-B.
Exhibit 4-B-5* Form of Fifth Supplemental Indenture dated as of September
1, 1990 between Ford Motor Credit Company and Manufacturers
Hanover Trust Company supplementing the Indenture designated
as Exhibit 4-B.
Exhibit 4-C* Indenture dated as of November 1, 1987 between Ford Motor
Credit Company and Continental Bank, National Association
relating to Debt Securities.
Exhibit 4-D* Indenture dated as of August 1, 1994 between Ford Motor
Credit Company and First Fidelity Bank, National
Association, relating to Debt Securities.
Exhibit 10-J* Copy of Amended and Restated Profit Maintenance Agreement
dated as of July 1, 1993 between Ford Motor Credit Company
and Ford Motor Company.
Exhibit 10-X* Copy of Agreement dated as of February 1, 1980 between Ford
Motor Company and Ford Motor Credit Company.
Exhibit 12-A Calculation of Ratio of Earnings to Fixed Charges of Ford
Credit.
Exhibit 12-B Calculation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends of Ford.
Exhibit 23 Consent of Independent Accountants.
Exhibit 24 Powers of Attorney.
- -------------------------
* Previously filed.