ITEM 1. BUSINESS
The registrant, Ford Motor Credit Company, was incorporated in Delaware in 1959 and is a 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.
Ford Credit provides wholesale financing and capital loans to franchised Ford Motor Company vehicle dealers and other dealers associated with such dealers and purchases 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 dealers. In addition, a wholly owned subsidiary of Ford Credit provides these financing services in the U.S. to other vehicle dealers. Vehicle financing accounted for 97.5% of the dollar volume of financing done by Ford Credit in 1993 and 97.3% in 1992. More than 85% of all new vehicles financed by Ford Credit are manufactured by Ford or its affiliates. Ford Credit also provides retail financing for used vehicles built by Ford and other manufacturers, which accounted for 19% of the dollar volume of retail vehicle financing done by Ford Credit in both 1993 and 1992. In addition to vehicle financing, Ford Credit makes loans to affiliates of Ford, finances certain receivables of Ford and its subsidiaries, and offers diversified financing services which are managed by USL Capital Corporation (formerly United States Leasing International, Inc.) ("USL Capital"), a wholly owned subsidiary of Ford Holdings, Inc. ("Ford Holdings").
In 1993 and 1992, United States operations, conducted in all 50 states, the District of Columbia and Puerto Rico, accounted for 93.8% and 93.2%, respectively, of the dollar volume of Ford Credit's financing business; Canadian operations accounted for 4.6% and 5.0%, respectively, of such volume in these periods. The balance was in Australia. In addition, Ford Credit manages the vehicle financing operations of Ford in other foreign countries which are conducted through other subsidiaries of Ford.
Ford Credit manages the insurance business of The American Road Insurance Company ("American Road"), a wholly owned subsidiary of Ford Holdings. Ford Credit is a significant equity participant in Ford Holdings whose primary activities consist of consumer and commercial financing operations, insurance underwriting and equipment leasing.
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 Annual Report on Form 10-K for the year ended December 31, 1993 filed with the Securities and Exchange Commission and for additional information concerning the business of Ford Holdings, see Ford Holdings' Annual Report on Form 10-K for the year ended December 31, 1993 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 11 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 gross finance receivables and net investment in operating leases outstanding in these four categories were as follows at the end of the years indicated:
*Includes net investment in operating leases.
Dollar volume of financing by Ford Credit was as follows during the years indicated:
* Includes operating lease volume.
VEHICLE FINANCING
RETAIL. Retail financing consists primarily of installment sale financing and retail lease financing of vehicles and loans to vehicle leasing companies, most of which are affiliated with franchised Ford Motor Company dealers. The number of installment sale and lease vehicles financed by Ford Credit was as follows during the years indicated:
The levels of Ford Credit's retail financing volume and outstanding receivables and lease investments 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 will vary depending on sales of receivables.
Installment sale financing consists principally of purchasing and servicing installment sale contracts covering sales of new and used vehicles by vehicle dealers to retail customers. The purchase price paid by Ford Credit to the dealer for an installment sale contract generally is the amount financed. In addition, a portion of the finance charge is paid or credited to the dealer. Ford Credit requires a retail customer to carry fire, theft and collision insurance on the vehicle. For 1993 in the U.S., the average repayment obligation for new vehicles covered by installment sale contracts purchased by Ford Credit was $17,471. The corresponding average monthly payment was $331 and the average original term was 54 months.
Retail lease financing consists principally of purchasing and servicing lease contracts covering new and used vehicles leased to retail customers by vehicle dealers. In recent years, vehicle leasing has increased in popularity by offering the retail customer a lower initial cash outlay for the vehicle and lower monthly payments when compared with conventional installment sale financing. Since 1990, retail lease financing has become a larger percentage of Ford Credit's total retail financing dollar volume, increasing from 15% in 1990 to 26% in 1993. The number of new and used vehicles for which Ford Credit provided retail lease financing increased from approximately 186,000 units in 1990 to approximately 521,000 units in 1993.
The amount paid by Ford Credit to the dealer for the vehicle and lease (the "acquisition cost") represents a negotiated amount agreed to between the dealer and the customer, less any trade-in or downpayment. The monthly lease payment equals the acquisition cost of the vehicle less the residual value of the vehicle established by Ford Credit, amortized over the lease term, plus the lease charge. A retail lessee is required to carry fire, theft, collision and liability insurance. 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 residual values published by the Automotive Lease Guide and Ford Credit's own historical experience in the used car market. In addition, joint marketing
programs with Ford's vehicle 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 60 months with 24 month and 36 month terms being by far the most popular. The average monthly payment and the average original term of U.S. retail lease contracts purchased by Ford Credit in 1993 were $370 and 29 months compared with $337 and 30 months in 1992.
The average original term of the lease financing extended to leasing companies and daily rental companies by Ford Credit in 1993 was 35 months and 15 months, respectively. Financing charges in connection with such lease financing generally are based on short-term interest rates in effect at the time the financing is extended. These rates may be supplemented by payments from Ford whenever the rate payable is less than the specified minimum rate agreed upon between Ford Credit and Ford. At December 31, 1993, 8 leasing companies each accounted for more than $10 million of such lease financing, three of which accounted for $402.1 million, $287.7 million and $82.6 million of such lease financing, respectively.
WHOLESALE. Wholesale financing consists principally of loans, under approved lines of credit, to dealers to assist them in carrying inventories of new 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 by American Road. Ford Credit's United States car and truck wholesale receivables that liquidated were outstanding an average of about 68 days in 1993 and 74 days in 1992.
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 field is highly competitive, particularly in the case of retail financing. Ford Credit's principal competitors for retail installment sale financing have been banks and credit unions. Banks and other leasing companies are Ford Credit's principal competitors for wholesale financing and lease financing.
Ford Credit financed the following percentages of new Ford and Lincoln-Mercury cars and trucks sold or leased at retail and sold at wholesale in the United States during each of the years indicated:
* As a percentage of total sales and leases, including cash sales
DIVERSIFIED FINANCING
Diversified finance receivables consist primarily of leases and loans secured by transportation equipment and facilities, some of which represent tax-exempt financing for state and local governments, energy related equipment and other equipment, real estate loans collateralized by first and second mortgages on
improved property and privately negotiated investments in preferred stock. Most diversified finance receivables represent transactions in an original amount in excess of $1 million each. Because of the relatively large size of individual diversified financing transactions, any individual loss arising out of such transactions could be substantial. Diversified finance receivables generally are intermediate-term; at December 31, 1993 approximately 28.4% of the outstanding receivables were scheduled to mature within five years.
In 1988, management responsibility for coordinating diversified financing activities was transferred to USL Capital. No transfer of assets was involved. In August 1990, USL Capital began funding for its own account certain diversified receivables that previously were funded by Ford Credit. As a result, the dollar volume of diversified financing has decreased since 1990. At December 31, 1993 diversified finance receivables outstanding represented 4.4% of Ford Credit's total gross 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 $1,769.3 million at December 31, 1993. From time to time, Ford Credit purchases accounts receivable of certain divisions and affiliates of Ford. The amount of such receivables as of the end of each month during 1993 fluctuated between $905.8 million and $1,076.9 million. At December 31, 1993, such receivables totaled $1,076.9 million, all of which represent accounts receivable purchased by Ford Credit from Ford pursuant to agreements under which Ford Credit may purchase such receivables. In addition to the foregoing receivables, Ford Credit held $780.3 million of other finance receivables at December 31, 1993.
CREDIT LOSS EXPERIENCE
The following table sets forth information concerning Ford Credit's credit loss experience with respect to the various categories of financing during the years indicated:
- - - - - - -----------
*Includes net losses on operating leases
- - - - - - ----------- *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 resale value of repossessed vehicles. Wholesale losses generally reflect the financial condition of dealers. For additional information regarding credit losses, see Notes 1 and 6 of Notes to Financial Statements.
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). Diversified finance receivables generally consist of leases and financings of personal property or real estate in which Ford Credit has ownership or security interests.
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 sales of commercial paper and issuance of term debt. 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, such as revolving credit and receivables sales agreements. In addition, Ford Credit from time to time sells its receivables in public offerings or private placements. 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 five years was as follows:
Memo:
(a) Short-term borrowing agreements with bank trust departments (b) Includes $150 million and $800 million with an affiliated company at December 31, 1993 and December 31, 1992, respectively
Outstanding commercial paper totaled $24.5 billion at December 31, 1993, up $3.3 billion from a year earlier. In 1993, long-term debt placements were $12.9 billion compared with maturities and early redemptions of $6.3 billion. Long-term debt placements in 1992 were $6.5 billion. In 1993, Ford Credit also received $2.5 billion from sales of receivables compared with $3.3 billion in 1992.
Support facilities represent additional sources of funds, if required. At January 1, 1994, Ford Credit had $15,716 million of contractually committed facilities for use in the United States, 83% of which are available through June 1998. These facilities included $12,841 million of revolving credit agreements with banks (which included $4,835 million of Ford bank lines that may be used either by Ford or Ford Credit at Ford's option) and $2,875 million of agreements to sell retail receivables. At January 1, 1994, all of these U.S. facilities were unused.
Outside of the United States, an additional $1,185 million of facilities support borrowing operations in Canada, Australia and Puerto Rico, of which 82% are contractually committed and available through June 1998. Canadian facilities of $759 million included $210 million of Ford Motor Company of Canada Limited and Ford Ensite International Inc. lines which are available to Ford Credit Canada Limited at the option of these two companies. Australian facilities of $401 million include $155 million of Ford Motor Company of Australia Limited lines which are available to Ford Credit Australia Limited at the option of Ford Motor Company of Australia Limited. Ford Motor Credit Company of Puerto Rico, Inc. had $25 million in support facilities at January 1, 1994. Substantially all of these facilities were unused at January 1, 1994.
FORD HOLDINGS
Ford Holdings was incorporated on September 1, 1989 for the principal purpose of acquiring, owning and managing certain assets of Ford. Ford Credit owns 45% of the common stock of Ford Holdings representing 33.8% of the voting power and Ford owns the remaining common stock representing 41.2% of the voting power. The balance of the capital stock, consisting of shares of Flexible Rate Auction Preferred Stock (Exchange), Series A Cumulative Preferred Stock, Series B Cumulative Preferred Stock and Series C Cumulative Preferred Stock, is held by persons other than Ford and accounts for the remaining 25% of the total voting power. Ford Holdings' primary activities consist of consumer and commercial financing operations, insurance underwriting and equipment leasing through its wholly owned subsidiaries, Associates First Capital Corporation ("The Associates"), American Road and USL Capital. Ford Credit accounts for its investment in Ford Holdings common stock using the equity method of accounting. For further information regarding Ford Holdings, see Notes 1, 2 and 12 of Notes to Financial Statements. See "Financial Review of Ford Motor Company Results - 1993 Results of Operations - Financial Services Operations" and "Liquidity and Capital Resources - Financial Services Operations" for a discussion of 1993 results of operations and liquidity and capital resources, respectively, of The Associates, American Road and USL Capital.
ASSOCIATES FIRST CAPITAL CORPORATION
The Associates conducts its operations primarily through its principal operating subsidiary, Associates Corporation of North America. The Associates' primary business activities are consumer finance, commercial finance and insurance underwriting. The consumer finance operation is engaged in making and investing in residential real estate-secured loans to individuals, making secured and unsecured installment loans to individuals, purchasing consumer retail installment obligations, investing in credit card receivables, financing manufactured housing purchases and providing other consumer financial services. The commercial finance operation is principally engaged in financing sales of transportation and industrial equipment and leasing, and providing other financial services, including automobile club, mortgage banking, and relocation services. The insurance operation is engaged in underwriting credit life, credit accident and health, property, casualty and accidental death and dismemberment insurance, principally for customers of the finance operations of The Associates.
The Associates' finance receivables were as follows at the dates indicated (in millions):
Credit loss experience, net of recoveries, of The Associates' finance business was as follows for the years indicated (dollar amounts in millions):
The following table shows total balances delinquent sixty days and more by type of business at the dates indicated (dollar amounts in millions):
An analysis of The Associates' allowance for losses on finance receivables is as follows for the years indicated (in millions):
THE AMERICAN ROAD INSURANCE COMPANY
American Road was incorporated as a wholly owned subsidiary of Ford Credit in 1959 and was transferred to Ford Holdings in 1989. The operations of American Road consist primarily of underwriting floor plan insurance related to substantially all new vehicle inventories of dealers financed at wholesale by Ford Credit in the United States and Canada, credit life and disability insurance in connection with retail vehicle financing, and insurance related to retail contracts sold by automobile dealers to cover vehicle repairs. In addition, Ford Life Insurance Company ("Ford Life"), a wholly owned subsidiary of American Road, offers single premium deferred annuities which are sold primarily through banks and brokerage firms. The obligations of Ford Life, including annuities, are guaranteed by American Road.
In the second quarter of 1992, Ford Credit discontinued purchasing collateral protection insurance ("CPI") from American Road for vehicles financed at retail by Ford Credit. As a result, total premiums written by American Road in 1992 were down 38% from 1991. The discontinuance of Ford Credit's purchase of CPI was a significant factor in American Road's 1992 profit decline from 1991 and had a negative but smaller impact on 1993 earnings. American Road exited the CPI market for vehicles and homes financed by other institutions by the end of 1993.
USL CAPITAL CORPORATION
USL Capital, a diversified commercial leasing and financing organization, originally incorporated in 1956, was acquired by Ford in 1987 and was transferred to Ford Holdings in 1989. In November 1993, the corporation's name was changed from United States Leasing International, Inc. to USL Capital Corporation. The primary operations of USL Capital include the leasing, financing, and management of office, manufacturing and other general-purpose business equipment; commercial fleets of automobiles, vans, and trucks; large-balance transportation equipment (principally commercial aircraft, rail, and marine equipment); industrial and energy facilities; and essential-use equipment for state and local governments. It also provides intermediate-term, first-mortgage loans on commercial properties and invests in corporate preferred stock and debt instruments. Certain of these financing transactions are carried on the books of Ford affiliates.
The following table sets forth certain information regarding USL Capital's earning assets, credit losses, and delinquent accounts at the dates indicated (dollar amounts in millions):
FORD CREDIT EMPLOYEE RELATIONS
At December 31, 1993, Ford Credit and its subsidiaries had 8,972 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 financing operations are regulated under both Federal and state law. Various states require licenses to conduct retail financing. Interest rates, particularly those with respect to consumer financing, generally are limited by state law and, in periods of high interest rates, these limitations can have a substantial adverse effect on operations in certain states 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.
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, has been amended and restated and expires at the end of 1998.
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 second- largest producer of cars and trucks in the world, and ranks among the largest providers of financial services in the United States.
GENERAL
The Company's two principal business segments are Automotive and Financial Services. The activities of the Automotive segment consist of the 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 Financial Services segment is comprised of the following subsidiaries: Ford Credit, Ford Credit Europe plc ("Ford Credit Europe"), First Nationwide Financial Corporation ("First Nationwide"), The Hertz Corporation ("Hertz"), Ford Holdings, The Associates, American Road and USL Capital. The activities of these subsidiaries include financing operations, insurance operations, savings and loan operations and vehicle and equipment leasing.
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 and, in any year, 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, and 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 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 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. Ford's ability to satisfy changing consumer preferences with 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.
In recent years, due to competitive pressures, vehicle manufacturers have both expanded the coverages and extended the terms of warranties on vehicles sold in the U.S. Ford presently provides warranty coverage on most vehicles sold by it in the U.S. that extends for 36 months or 36,000 miles (whichever occurs first) and covers nearly all components of the vehicle. Different warranty coverages are provided on vehicles sold outside the U.S. In addition, as discussed below under "Governmental Standards - Mobile Source Emissions Control", amendments to the Federal Clean Air Act extend the required useful life for emissions equipment on vehicles sold in the U.S. to 10 years or 100,000 miles (whichever occurs first). As a result of these coverages 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.
UNITED STATES
Sales Data. The following table shows U.S. industry demand for the years indicated:
Ford classifies cars by small, middle, large and luxury segments and trucks by compact pickup, compact van/utility, full-size pickup, full-size van/utility and medium/heavy segments. The large and luxury car segments and the compact van/utility, full-size pickup and full- size van/utility truck segments include the industry's most profitable vehicle lines. 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:
* Includes Jaguar sales since 1990.
As shown in the first table above, the percentages of industry sales in the various car segments have remained relatively stable since 1989. As shown in the second table above, Ford's proportion of sales in 1992 and 1993 has increased in the middle segment and decreased in the small and luxury segments, reflecting higher sales of Thunderbird, Cougar, Taurus, Sable, Tempo and Topaz models and lower sales of Escort, Festiva, Mark and Continental models.
As shown in the tables above, for both the industry and Ford, the compact van/utility segment has grown significantly since 1989, while the full-size segments (pickups and van/utility) have declined as a percentage of total truck sales.
Market Share Data. The following tables show changes in car and truck market shares of United States and foreign-based manufacturers for the years indicated:
____________________ * All U.S. retail sales data are based on publicly available information from the American Automobile Manufacturers Association, the media and trade publications.
** Includes Jaguar sales since 1990.
*** 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 and Taiwan.
___________________ * All U.S. retail sales data are based on publicly available information from the American Automobile Manufacturers Association, the media and trade publications.
** Includes Jaguar sales since 1990.
*** 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 and Taiwan.
Japanese Competition. The market share of Ford and other domestic manufacturers in the U.S. 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 increased from 21.6% in 1989 to 25.5% in 1991, but declined to 22.8% in 1993, reflecting in part the effects of the strengthening of the Japanese yen on the prices of vehicles produced by the Japanese manufacturers.
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, the significant growth of Japanese car sales in the U.S. and international trade considerations. Production in the U.S. by Japanese transplants reached 1.6 million units in 1993 and is expected to reach about 2.5 million units a year when additional Japanese transplant capacity becomes fully operational.
Excess Capacity In North America. In 1993, automotive capacity in North America, including Japanese transplants, exceeded industry sales by over 5.2 million units. This excess capacity (which includes overtime capacity) reflected the effect of productivity gains made by manufacturers, added capacity of Japanese transplants and lower-than-normal industry-wide sales resulting from modest economic growth.
Marketing Incentives and Fleet Sales. As a result of intense competition from new product offerings (from both domestic and foreign manufacturers), excess industry capacity as discussed above and the desire to maintain economic production levels, automotive manufacturers that sell vehicles in the U.S. have provided marketing incentives (price discounts) to retail and fleet customers (i.e., daily rental companies, commercial fleets, leasing companies and governments).
Ford's U.S. marketing costs as a percentage of net sales revenue for each of 1993, 1992 and 1991 were: 10.9%, 12% and 16%, respectively. During the 1983-1988 period, such costs as a percentage of sales revenue were in the 4% to 7% range. "Marketing costs" include (i) marketing incentives such as retail rebates and 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.
Sales by Ford to fleet customers were as follows for the years indicated:
Fleet sales generally are less profitable than retail sales. Within total fleet sales, the mix between sales to daily rental companies and sales to other fleet purchasers improved in 1992 and 1993; sales to daily rental companies declined, while other fleet sales (which tend to be more profitable) increased.
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 16% 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 11.6% for 1993, increase their production capacity in Europe and import restrictions on Japanese built-up vehicles gradually are removed.
In 1993, European car industry sales were 10.8 million cars, down 16% from 1992 levels. Truck sales were 1.7 million units, down 17% from 1992 levels. Ford's European car share for 1993 was 11.8%, compared with 11.5% for 1992, and its European truck share for 1993 was 12.6%, compared with 11.7% for 1992.
For Ford, Great Britain and Germany are the most important markets within Europe, although the Southern European countries are becoming increasingly significant. Great Britain traditionally has been Ford's major source of European automotive profits, and any adverse change in this market has a strong effect on total automotive profits. For 1993 compared with 1992, total industry sales were up 10% in Great Britain and down 19% 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; however, Canada continues to be in a recessionary period. In 1993, industry sales of cars and trucks in Canada were down 3% from 1992 levels, while the U.S. experienced an 8% increase in industry sales. Mexico has been a growing market; however, in 1993, industry sales were down 15% to 603,000 units.
The North American Free Trade Agreement ("NAFTA") became effective January 1, 1994. NAFTA unites Canada, Mexico and the United States into the world's largest trading region by phasing out regulations which restricted trade between Mexico and the U.S. and Canada. The Company believes that NAFTA will benefit the economies of the three countries and the North American automobile industry in particular.
Latin America. Brazil, Argentina and Venezuela 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. In 1993, Ford's profitability in the region improved significantly compared with 1992, primarily reflecting strong results in Brazil. Autolatina (Ford's joint venture with Volkswagen in Brazil and Argentina) remained the market leader in Brazil. In Brazil, a new economic plan aimed at stabilizing the Brazilian economy and reducing inflation was unveiled in late 1993. It is presently unclear to what extent the new plan will affect overall economic conditions. In addition, duties on vehicles imported into Brazil have declined progressively from 85% in 1990 to 35% in October 1993. As a result, imports are expected to gain a progressively larger share of the car market in Brazil. Autolatina's future results largely will be dependent on the political and economic environments in Brazil and Argentina, which historically have been unpredictable.
Asia-Pacific. In the Asia-Pacific region, Australia and Taiwan are the principal markets for Ford products. In both markets, Ford is the car market share leader. In Taiwan (where sales of built-up vehicles manufactured in Japan are prohibited), Ford has total vehicle sales leadership. 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.
Ford believes that the Asia-Pacific region offers many important opportunities for the future. Ford is investigating automotive component manufacturing and vehicle assembly opportunities in China and is expanding the number of right-hand-drive vehicles it will offer in Japan. A key element of Ford's presence in the Asia-Pacific region is its long-standing relationship with Mazda Motor Corporation, in which it has held a 25% ownership interest since 1979. Recent management appointments by Mazda of Ford personnel have been made to improve coordination of business and product plans in the Asia-Pacific region.
FINANCIAL SERVICES OPERATIONS
For information regarding the businesses of Ford Credit, Ford Holdings, The Associates, American Road and USL Capital, see "Business of Ford Credit" and "Ford Holdings".
Ford Credit Europe plc. In 1993, most of the European credit operations of Ford, which generally had been organized as subsidiaries of the respective automotive affiliates of Ford throughout Europe, were consolidated into a single company, Ford Credit Europe. Ford Credit Europe, which was originally incorporated in 1963 in England as a private limited company, is wholly owned by Ford and certain of its subsidiaries. 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. The business of Ford Credit Europe is substantially dependent upon Ford's automotive operations in Europe. Ford Credit Europe issues commercial paper, certificates of deposits and term debt to fund its credit operations. One of the purposes of the consolidation described above is to facilitate Ford Credit Europe's access to public debt markets. Ford Credit Europe's ability to obtain funds in these markets is affected by its credit ratings, which are closely related to the financial condition of and outlook for Ford.
First Nationwide Financial Corporation. First Nationwide, a savings and loan holding company organized in Delaware in 1959, was acquired by Ford in December 1985. It is a wholly owned subsidiary of Ford.
The principal asset of First Nationwide is the capital stock of First Nationwide Bank, A Federal Savings Bank ("First Nationwide Bank" or the "Bank"). The Bank is a federally chartered, capital stock savings bank which, with its predecessor institutions, has been in the savings and loan business since 1885. The principal business of the Bank consists of attracting savings deposits from the public and making loans collateralized by liens on residential and other real estate. Income is derived from interest charges on real estate loans and, to a lesser extent, from fees received in connection with such loans and interest on securities investments. The major expense of the Bank is the interest it pays on savings accounts and on borrowings.
First Nationwide's loans receivable (including those of the Bank) were as follows at the dates indicated (in millions):
* Certain amounts for 1992 have been restated to conform with presentations adopted in 1993.
Included in the above receivables at December 31, 1993 and 1992 were $9.0 billion and $10.2 billion, respectively, of variable rate real estate loans. Loans held for sale, not included above, were $288 million and $195 million at December 31, 1993 and 1992, respectively.
The percentages of real estate loans by state were as follows at December 31, 1993, excluding accrued interest receivable, discounts and premiums, and loss reserves, and including $288 million of loans held for sale: California - 55.4%; New York - 10.8%; Florida - 3.8%; Illinois - 3.2%; and 46 other states, none of which exceeded 3.0% of total real estate loans.
The following table reflects at the dates indicated the amount of non-accrual, past due, and troubled debt restructured loans including the interest income recognized and total interest income that would have been recognized had the borrowers performed under the original terms of the loans (in millions):
* Certain amounts for 1992 have been restated to conform with presentations adopted in 1993.
At December 31, 1993, there were no commitments to lend additional funds to borrowers whose loans were on non-accrual status or were restructured.
An analysis of First Nationwide's allowance for losses on loans is as follows for the years indicated (in millions):
Federally chartered savings and loan institutions are regulated principally by the Office of Thrift Supervision ("OTS"), a bureau of the Department of Treasury. Deposit insurance for these institutions is provided by the Federal Deposit Insurance Corporation ("FDIC"). Regulated areas include: capital requirements, payments of dividends, transactions with affiliates and activities that might create a serious risk to insured institutions.
The Bank is subject to regular concurrent examinations of its operations by the OTS and the FDIC, the most recent of which were completed in December 1993. In response to examiners' concerns expressed in recent examinations, the Bank has taken positive steps to improve asset quality and other areas of its operations. The Bank filed its response to the most recent OTS examination report in January 1994. Pursuant to an agreement with the OTS, the FDIC did not issue a separate examination report.
For a discussion of the losses incurred by First Nationwide in 1993 and 1992, see "Financial Review of Ford Motor Company Results".
Ford presently is investigating strategic actions with respect to First Nationwide. Such actions could include the sale of a substantial portion of the Bank's assets. It is premature at this time, however, to determine whether any actions will occur and what impact, if any, such actions could have on Ford's financial results.
The Hertz Corporation. On March 8, 1994, Ford purchased from Commerzbank Aktiengesellschaft, a German bank, additional shares of common stock of Hertz aggregating 5% of the total outstanding voting stock, thereby bringing Ford's ownership of the total voting stock of Hertz to 54% from 49%. Since the Company was a principal shareholder of Hertz prior to the purchase from Commerzbank, no significant change in the relationship between Ford and Hertz is expected. The effect of this transaction on Ford's consolidated financial statements is not expected to be material. Hertz had been accounted for on an equity basis; following the purchase, Hertz's operating results, assets, liabilities, and cash flows will be consolidated in Ford's financial statements, as part of the Financial Services business segment. Hertz is engaged principally in the business of renting automobiles and renting and leasing trucks, without drivers, in or through approximately 5,200 locations throughout the U.S. and in over 140 foreign countries.
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 and Europe. In addition, manufacturing and assembly facilities in the United States and Europe are subject to stringent standards regulating air emissions, water discharges and the handling and disposal of hazardous substances. Such facilities in the United States also are subject to a comprehensive federal-state permit program relating to air emissions. Many of the standards will become increasingly stringent. Moreover, additional and even more stringent standards and regulations, notably car and truck emissions and CAFE standards, may be made applicable to future model vehicles as well as to existing and future facilities. The technological feasibility of achieving compliance with some of these standards and regulations has not been established on a commercial basis. Assuming that compliance with all applicable standards and regulations can be achieved within the prescribed time frame, it will be extremely costly and it could be necessary for Ford to take such actions as curtailing or eliminating production of certain cars, trucks and engines. Such actions could have substantial adverse effects on Ford's sales volume and profits.
Mobile Source Emissions Control -- As amended in November 1990, the Federal Clean Air Act (the "Clean Air Act" or the "Act") imposes significantly more 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 than those previously in effect. The effective dates of these standards, some of which have phase-in periods, vary depending upon the type of vehicle, but begin to apply as early as the 1994 model year. In addition, the Act doubles the length of the "useful life" during which compliance with the applicable standards must be achieved. Passenger cars, for example, must comply for 10 years or 100,000 miles, whichever first occurs. The Act prohibits, among other things, the sale in or importation into the United States of any new motor vehicle or engine which is not covered by a certificate of conformity issued by the United States Environmental Protection Agency (the "EPA").
The Act also may require production of certain new cars and trucks capable of operating on fuels other than gasoline or diesel fuel ("alternative fuels") under a pilot test program to be conducted in California beginning in the 1996 model year. Under this pilot program, each manufacturer will be required to sell its pro rata share of 150,000 vehicles in each of the 1996, 1997 and 1998 model years and its pro rata share of 300,000 vehicles in each model year thereafter. The Act also authorizes certain states to establish programs to encourage the purchase of such vehicles.
Motor vehicle emissions standards even more stringent than those referred to above will become effective as early as the 2003 model year, unless the EPA determines that such standards are not necessary, technologically feasible or cost-effective.
The Act authorizes California to establish unique emissions control standards that, in the aggregate, are at least as stringent as the federal standards if it secures the requisite waiver of federal preemption from the EPA. The Health and Safety Code of the State of California prohibits, among other things, the sale to an ultimate purchaser who is a resident of or doing business in California of a new motor vehicle or engine which is intended for use or registration in that state which has not been certified by the California Air Resources Board (the "CARB"). The CARB received a waiver from the EPA for a series of passenger car and light truck emissions standards (the "low emission vehicle", or "LEV", standards), effective beginning between the 1994 and 2003 model years, that are more stringent than those prescribed by the Act for the corresponding periods of time. These California standards are intended to
promote the development of various classes of low emission vehicles. California also requires 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.
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 a commercially viable electric vehicle. To comply with the mandate, manufacturers may have to offer substantial discounts on electric vehicles, selling them well below cost, or increase the price or curtail the sale of non-electric vehicles. The California emissions standards 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 with air quality problems to adopt new motor vehicle emissions standards identical to those adopted by California, if such states lawfully adopt such standards two years before commencement of the affected model year. In October 1991, a group of twelve northeastern states and the District of Columbia, the Ozone Transport Commission (the "OTC"), organized under provisions of the Act and executed a Memorandum of Understanding under which they agreed to propose adoption of the California LEV standards. On February 1, 1994, the OTC voted to recommend to the EPA that it require all member states to adopt the California LEV standards in their state implementation programs. The EPA must act on the petition within nine months after its receipt. Adoption of the California LEV standards by any state will present challenges and potential adverse effects similar to those that will be experienced in California, which may be further aggravated by conditions in a particular state.
In November 1990, the Department of Environmental Conservation (the "DEC") of the State of New York adopted regulations, effective beginning in the 1993 model year, that are intended to require that vehicles sold in that state comply with California's 1993 model year (pre- LEV) emissions standards. In May 1992, the DEC adopted regulations purporting to implement the California LEV standards beginning in the 1994 model year. The American Automobile Manufacturers Association ("AAMA"), of which Ford is a member, and the Association of International Automobile Manufacturers ("AIAM") challenged the legality of the DEC's adoption of the LEV standards, as inconsistent with its legal authority under the Act. A ruling by the U.S. District Court in Binghamton, New York, that the DEC's adoption of the LEV standards violated certain provisions of the Act (and was, therefore, invalid) was appealed to the U.S. Court of Appeals for the Second Circuit (the "Second Circuit Court"). On February 4, 1994, the Second Circuit Court upheld certain aspects of the State of New York's adoption of the California LEV standards, including the ZEV sales mandate. However, the Second Circuit Court also held that the standard would not apply to 1995 model year vehicles, thereby making the standard applicable to 1996 and beyond model year vehicles. A 1990 Massachusetts law, as implemented by regulations issued in 1992, purports to adopt the California LEV standards beginning in the 1995 model year. A special study commission established by the Massachusetts legislature to re-evaluate adoption of the California Act and standards recommended proceeding with their adoption. The AAMA and AIAM are challenging the adoption of the standards in the U.S. District Court in Massachusetts.
Under the Act, if the EPA determines that a substantial number of any class or category of vehicles, although properly maintained and used, do not conform to applicable emissions standards, a manufacturer may be required to recall and remedy such nonconformity at its expense. Further, if the EPA determines through testing of production vehicles that emission control performance requirements are not met, it can halt shipment of motor vehicles of the configuration tested. California has similar, and in some respects greater, authority to
order manufacturers to recall vehicles. Ford has been required, and may in the future be required, to recall vehicles for such purposes from time to time. The costs of related repairs or inspections associated with such recalls can be substantial.
The European Union has established standards which, in many cases, will require motor vehicle emissions control equipment similar to that used in the U.S. These standards, which are of generally equivalent stringency to 1983 model year U.S. standards for gasoline-powered vehicles and 1987 model year standards for diesel-powered vehicles, are applicable to vehicles type-approved after July 1, 1992, and registered after December 31, 1992. The EU Council of Ministers has unanimously adopted a common position approving a proposal by the European Commission to adopt more stringent motor vehicle emission standards. Under the European Union's new co-decision procedure, the Council's common position must be referred to the European Parliament (which may accept, modify or reject the proposal) for further action before the proposal can be adopted. Under the co-decision procedure, adoption is expected to be completed in the first half of 1994. The proposed standards would apply to vehicle homologations (i.e., the European regulatory certification process) beginning January 1, 1996 and to new vehicle registrations beginning January 1, 1997 and are of generally equivalent numerical stringency to those which begin to apply in the U.S. for the 1994 model year. The common position also provides for the European Commission to propose by the end of 1994 supplementary reductions in motor vehicle emissions that would take effect beginning January 1, 2000. Such supplemental reductions would be a function of technical progress achieved between now and 2000. When the more stringent standards are adopted, European Union member countries would be permitted to provide "green" incentives for the purchase of vehicles that comply with the new standards before their effective date. Certain other European countries also have established, and may in the future establish, unique automotive emissions standards.
Certain European countries, including member countries of the European Union, are conducting in-use emissions testing to ascertain compliance of motor vehicles with applicable emissions standards. These actions could lead to recalls of vehicles and the future costs of related repairs or inspections could be substantial.
Motor Vehicle Safety -- Under the National Traffic and Motor Vehicle Safety Act of 1966, as amended (the "Safety Act"), the National Highway Traffic Safety Administration (the "Safety Administration") is required to establish appropriate federal motor vehicle safety standards that are practicable, meet the need for motor vehicle safety and are stated in objective terms. Since 1968 the Safety Act has prohibited the sale in the United States of any new motor vehicle or item of motor vehicle equipment that does not conform to applicable federal motor vehicle safety standards. The Safety Administration has announced its intention to establish additional such standards in the near future, which Ford supports in principle. Ford expects to be able to comply with those standards but only at significantly increased costs, because doing so will tend to conflict with the need to reduce vehicle weight in order to meet stringent emissions and fuel economy standards. The Safety Administration also is required to make a determination on the basis of its investigation whether motor vehicles or equipment contain defects related to motor vehicle safety or fail to comply with applicable safety standards and, generally, to require the manufacturer to remedy any such condition at its own expense. The same obligation is imposed on a manufacturer which obtains knowledge that any motor vehicle manufactured by it contains a defect determined in good faith by it to be related to motor vehicle safety. There currently are pending before the Safety Administration a number of major investigations relating to alleged safety defects or alleged noncompliance with applicable 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 certain of such investigations, could be substantial.
The European Union, individual Member States within the European Union and other countries in Europe also have safety standards applicable to motor vehicles and are likely to adopt additional or more stringent standards in the future. The cost of complying with these standards, as well as the cost of any recall programs to remedy safety defects or noncompliance, could be substantial.
Motor Vehicle Fuel Economy -- Passenger cars and trucks rated at less than 8,500 pounds gross vehicle weight are required by regulations issued by the Safety Administration pursuant to the Motor Vehicle Information and Cost Savings Act (the "Cost Savings Act") to meet separate minimum CAFE standards. Failure to meet the CAFE standard in any model year, after taking into account all available credits, is deemed to be unlawful conduct and would subject a manufacturer to the imposition of a civil penalty equivalent to $5 for each one-tenth of a mile per gallon ("mpg") under the applicable standard multiplied by the number of vehicles in the class (i.e., domestic cars, domestic trucks, imported cars or imported trucks) produced in that model year. Each such class of vehicle may earn credits either as a result of exceeding the standard in one or more of the preceding three model years ("carryforward credits") or pursuant to a plan, approved by the Safety Administration, under which a manufacturer expects to exceed the standard in one or more of the three succeeding model years ("carryback credits") but credits earned by a class may not be applied to any other class of vehicles.
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 asserts it has the authority to amend to a level it determines to be the "maximum feasible" level (considering the following factors: technological feasibility, economic practicality, the effect of other federal motor vehicle standards on fuel economy, and the need of the nation to conserve energy). Pursuant to the Cost Savings Act, the Safety Administration established CAFE standards applicable to 1994 and 1995 model year light trucks (under 8,500 lbs. GVW) at 20.5 mpg and 20.6 mpg, respectively (on a combined two-wheel drive/four-wheel drive basis). It also has issued a Notice of Proposed Rulemaking ("NPRM") proposing to set standards for light trucks within the range of 20.5 mpg to 21.5 mpg for model years 1996 and 1997.
If the Safety Administration sets light truck standards for the 1996 and 1997 model years within the range proposed in the NPRM referred to above, Ford expects to be able to comply with the CAFE standards applicable to its 1994 through 1997 model year "domestic" and "import" cars and light trucks, although it may be necessary to use credits to do so.
Despite Ford's expectations of compliance, however, there are factors that could jeopardize its ability to comply. These factors include the possibility of changes in market conditions, including a shift in demand for larger vehicles and a decline in demand for small and middle-size vehicles; or conversely, a shortage of reasonably priced gasoline resulting in a decreased demand for more profitable vehicles and a corresponding increase in demand for relatively less profitable vehicles.
It is anticipated that efforts may be made to raise the CAFE standard because of concerns for CO2 emissions, energy security or other reasons. President Clinton's Climate Change Action Plan 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, using a combination of regulatory and non-regulatory measures. If the entire goal, or a substantial portion of the goal, is to be achieved through higher CAFE standards, 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 could find it necessary to curtail or eliminate production of larger family-size and luxury passenger 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 passenger cars and light trucks.
The Energy Tax Act of 1978, as amended, imposes a federal excise tax on automobiles which do not achieve prescribed fuel economy levels. Additional legislative proposals could be introduced that, if enacted, would increase excise taxes or create economic disincentives to purchase any except the least fuel consuming vehicles. Because of the uncertainties and variables inherent in testing for fuel economy and the uncertain effect on fuel economy of other government requirements, it is not possible to predict the amount of excise tax, if any, which may be incurred.
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, intellectual property rights, product warranties and 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. See "Business of Ford --Governmental Standards". Included among the foregoing matters are the following:
Product Matters -- Three suits purporting to be nationwide class actions were filed by some of the plaintiffs of a previously dismissed federal action that allege claims that are substantially the same as those in the dismissed federal action -- i.e., that they are or were purchasers or owners of or passengers in 1976 through 1979 model year Ford vehicles equipped with certain automatic transmissions who have incurred property damage, personal injury, economic losses or liability for such losses by reason of an alleged tendency of the vehicles to slip from park to reverse. A judgment dismissing the first such suit by the Superior Court for the District of Columbia was vacated by the local Court of Appeals for the District of Columbia, and renewed motions to dismiss are under consideration by the Superior Court. The second suit was filed in the Court of Common Pleas in Philadelphia, Pennsylvania, and has been stayed pending the entry of final and non-appealable orders in the action referred to in the immediately preceding sentence. The third suit was filed in the Circuit Court of Cook County, Illinois. That court granted the Company's motion to stay proceedings indefinitely and the plaintiffs have appealed that ruling to the Appellate Court of Illinois for the First Judicial District-Third Division.
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 $439 million at January 1, 1994.
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 $367 million at January 1, 1994.
In some 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. 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 $163 million at January 1, 1994. (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 two government environmental enforcement agencies concerning two separate matters, each potentially involving monetary sanctions exceeding $100,000. One agency believes a Ford facility may have violated regulations relating to the management of certain of the facility's wastes and the other agency believes a Ford facility may violate or may have violated limits established by regulations or permits for emissions or discharges.
Ford has received notices under RCRA, the Superfund Act 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 other of these sites the remediation costs and other damages for which Ford ultimately may be responsible are not reasonably estimable because of the 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.
On August 7, 1992, Ford was sued in federal court in Nevada by an individual patent owner seeking damages and an injunction for alleged infringement of three (later amended to four) U.S. patents characterized by the individual as covering machine vision inspection technologies, including bar code reading. Ford and one of its suppliers, Motorola, have filed a declaratory judgment action in the same court to have those patents and several other patents directed to machine vision, radiation beam (e.g., laser and electron beam) uses and semiconductor manufacturing (17 patents in all) declared invalid, unenforceable and not infringed. If the patent holder 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 uses of any process or product found to be covered by a valid patent.
On March 15, 1993, Ford was served with a private purported class action lawsuit in Texas relating to allegations of paint peeling on unspecified Ford vehicles. The purported class would include all persons who purchased new or used Ford vehicles in Texas and who experienced paint peeling as a result of unspecified defects in Ford's paint process. The plaintiffs seek an unspecified amount of damages.
Ford has been served with various private purported class action lawsuits seeking economic damages (including damages for diminution in value and rescission of purchase agreements) on behalf of Bronco II vehicle owners relating to the alleged propensity of such vehicles to roll over. The purported classes include all Bronco II owners in the United States. 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.
Ford of Germany and Volkswagen AG have formed a joint venture to produce a multi-purpose vehicle ("MPV") in Portugal. The Portuguese government has agreed to grant an incentive package to the joint venture. On June 15, 1993 the European Court of Justice rejected a claim filed by a French manufacturer of MPVs challenging the legality of the grant. The same manufacturer has filed an appeal with the European Court challenging the decision of the European Commission in December 1992 granting antitrust approval of the joint venture. Ford has intervened in these proceedings. If the French manufacturer succeeds in the antitrust case, which Ford considers unlikely, the joint venture could be dissolved, the grants may have to be repaid and the participants in the joint venture might have to write off substantial development costs.
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, Spain, Germany and France.
Collective bargaining agreements between Ford and the UAW and between Ford of Canada and the Canadian Automobile Workers were entered into in 1993 and are scheduled to expire in September 1996.
SELECTED FINANCIAL DATA OF FORD
The following tables set forth selected financial data and other data concerning Ford for each of the last ten years (dollar amounts in millions except per share amounts):
(1) 1989 includes an after-tax loss of $424 million from the sale of Rouge Steel Company.
(2) Share data have been adjusted to reflect stock dividends and stock split.
(3) The cumulative effects of changes in accounting principles reduced equity by $6,883 million in 1992.
(4) Per hour worked (in dollars). Excludes data for subsidiary companies.
(5) Includes units manufactured by other companies and sold by Ford.
(6) Factory sales are by source of manufacture, except that Canadian, Mexican and Australian exports to the United States are included as U.S. vehicle sales, and U.S. exports to Canada are included as Canadian vehicle sales.
(7) Includes units sold by Ford in Brazil and Argentina through June 30, 1987, and excludes units sold by Autolatina.
(8) Ford's tractor operation, Ford New Holland, was sold on May 6, 1991.
FINANCIAL REVIEW OF FORD MOTOR COMPANY RESULTS
Overview
The Company's worldwide net income in 1993 was $2,529 million, or $4.55 per share of Common and Class B Stock, compared with a loss of $7,385 million, or $15.61 per share in 1992. Sales and revenues totaled $108.5 billion in 1993, up 8% from 1992. Factory unit sales of cars and trucks were 5,964,000, up 200,000 or 3%.
In 1992, Ford adopted new accounting standards for postretirement benefits (principally retiree health care) and income taxes that resulted in a one-time charge to net income in 1992 for prior years of $6,883 million. Excluding the one-time effects of these accounting changes, the Company incurred a net loss of $502 million or $1.46 per share in 1992.
The Company's financial results in 1993 showed substantial improvement compared with 1992. Improvements in U.S. Automotive operations included the favorable effects of higher industry volume, higher share, and improved margins. Automotive operations outside the U.S. also improved, despite lower industry volumes in Europe. Earnings from Financial Services operations were a record and increased 54% compared with 1992.
The Company continued its product development and cost reduction programs to strengthen its competitive position. In 1993, capital spending for new products and facilities was $6.8 billion, up $1 billion from 1992. Automotive debt at the end of 1993 was $8,016 million, down $301 million from year-end 1992. Cash and marketable securities for the Company's Automotive segment totaled $9,752 million, up $717 million from year-end 1992.
In 1994, the Company expects continued improvements in operating results from cost reduction efforts, new product introductions, and a moderate rate of economic growth in the United States. The Company expects sales for the U.S. car and truck industry to reach about 15 million units in 1994. Several new products will be introduced in 1994, including the Ford Windstar, Ford Aspire, Ford Contour and Mercury Mystique. Per-unit U.S. marketing costs for Ford, which declined in 1993, should decline further in 1994 as industry sales increase and new products are introduced.
The Company expects industry sales in Europe to be up slightly in 1994, compared with 1993. As a result of an expected continuation of the gradual economic recovery in Great Britain and the restructuring actions undertaken in Europe during 1993, the operating results of European Automotive operations are projected to improve in 1994, compared with 1993. In Latin America, the near-term business outlook is favorable, but business conditions have historically been volatile and subject to rapid change.
FOURTH QUARTER OF 1993
In the fourth quarter of 1993, the Company's worldwide net income was $719 million or $1.30 per share of Common and Class B Stock, compared with a loss of $840 million, or $1.85 per share in the fourth quarter of 1992.
Worldwide Automotive operations earned $297 million in the fourth quarter of 1993, compared with a loss of $1,037 million a year ago. U.S. Automotive operations earned $669 million in the fourth quarter of 1993, compared with a loss of $128 million a year ago, while Automotive operations outside the U.S. incurred a loss of $372 million, compared with a loss of $909 million a year ago. Financial Services earned $422 million in the fourth quarter of 1993, compared with $197 million a year ago.
Net income for Automotive operations outside the U.S. were adversely affected in the fourth quarter of 1993 by restructuring actions at Jaguar ($109 million) and Ford of Australia ($57 million), offset partially by the favorable one-time effects of a reduction in German tax rates ($59 million). Automotive operations in the U.S. were favorably affected by the gain on the sale of Ford's North American automotive seating and seat trim business ($73 million). The loss a year ago included one-time European restructuring charges of $334 million for Automotive operations and $85 million for Financial Services operations.
The following discussion of the results of operations excludes the one-time effects associated with accounting changes in 1992 as discussed above.
1993 RESULTS OF OPERATIONS
AUTOMOTIVE OPERATIONS
Net income from Ford's worldwide Automotive operations was $940 million in 1993 on sales of $91.6 billion. In 1992, worldwide Automotive operations incurred a loss of $1,534 million (excluding the accounting changes) on sales of $84.4 billion.
In the U.S., Ford's Automotive operations earned $1,482 million on sales of $61.6 billion, compared with a loss of $405 million in 1992 on sales of $51.9 billion. Higher vehicle production, reflecting higher industry sales and a higher Ford market share, accounted for most of the improvement. Improved margins, reflecting mainly favorable material costs, manufacturing efficiencies, and lower marketing costs, were offset partially by higher costs for new products and related facilities. Results in 1993 included the one-time favorable effect of tax legislation ($171 million) for the restatement of U.S. deferred tax balances for the Federal income tax rate increase from 34% to 35% and the gain on the sale of Ford's North American automotive seating and seat trim business ($73 million). On an ongoing basis, the effect of the tax rate change on future tax expense will be unfavorable.
In 1993, the U.S. economy continued to grow at a modest rate. In the eleven quarters since the recovery began in the Spring of 1991, the rate of growth in the gross domestic product (GDP) has averaged 2.7%, 60% of the rate over the comparable period during the last six recoveries. Slow growth has helped reduce interest rates and inflation to low levels. Industry sales of cars and trucks in the United States have gradually increased from 12.5 million units in 1991 to 14.2 million units in 1993. Over this period, Ford's combined U.S. car and truck market share has improved -- from 23.2% in 1991 to 25.5% in 1993 -- to the highest level since 1978. The Company also has benefited from reduced marketing incentives, lower supplier cost increases, and other cost efficiencies.
Full year U.S. car and truck industry volumes increased from 13.1 million units in 1992 to 14.2 million units in 1993. Over 70% of the increase in industry sales was attributable
to trucks (including minivans, compact utility vehicles, and compact pickups). Ford's share of the U.S. car market (including Jaguar) was 22.3%, up 5/10 of a point from 1992. The Company's U.S. truck share was 30.5%, up 8/10 of a point from 1992. The improved market share for cars and trucks reflected strong product acceptance.
Outside the U.S., Ford's Automotive operations lost $542 million in 1993 on sales of $30.0 billion, compared with a loss of $1,129 million in 1992 on sales of $32.5 billion. Results improved despite a weak economy in Europe that resulted in the lowest level of industry sales in eight years. Savings from cost reduction actions in Europe and improved results in Latin America, reflecting primarily higher industry volume in Brazil, more than offset the effects of lower volume in Europe. The loss in 1993 included restructuring charges at Jaguar ($174 million), primarily for resourcing stamping and restructuring other operations to improve efficiency, and at Ford of Australia ($57 million), related to discontinuing production of the Capri and Laser model, offset partially by the favorable one-time effect of a reduction in German tax rates ($59 million). Losses in 1992 included restructuring charges of $334 million.
Ford's European Automotive operations (excluding Jaguar) lost $407 million, compared with a loss of $647 million in 1992. The improvement reflected nonrecurrence of the one-time restructuring charge ($334 million) in the fourth quarter of 1992, primarily for planned reductions in employment levels. Lower vehicle production, reflecting lower industry sales (down 16%), higher costs for new products, and the unfavorable effect of fluctuations in foreign currency exchange rates were partially offset by manufacturing efficiencies and other cost improvements.
Car and truck industry sales in Europe were 12.5 million units in 1993, compared with 15 million units in 1992. Ford's European car market share (including Jaguar) was 11.8% in 1993, up 3/10 of a point from 1992. Ford's European truck share improved 9/10 of a point to 12.6%.
FINANCIAL SERVICES OPERATIONS
The Company's Financial Services operations earned a record $1,589 million in 1993, up $557 million from 1992. Higher volume, reduced interest rates and operating costs, and lower credit losses contributed to record earnings at Financial Services operations, including Ford Credit, The Associates, and USL Capital. Results in 1993 included an unfavorable one-time effect of $31 million from tax legislation in the U.S. Results in 1992 of $1,032 million excluded a favorable effect of $211 million associated with one-time accounting changes, mainly for income taxes, but include organizational restructuring charges relating to European Financial Services operations ($85 million).
See Item 7. -- "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the discussion of Ford Credit's 1993 results of operations. In addition, international operations managed by Ford Credit earned $199 million in 1993, up $11 million from 1992, primarily reflecting improved net interest margins and lower credit lossess offset partially by the unfavorable effect of exchange rates.
The Associates earned a record $470 million in the U.S. in 1993, up $77 million from 1992. The improvement was more than explained by improved credit loss performance and higher levels of earning assets. In addition, international operations managed by The Associates earned $38 million in 1993, the same as in 1992.
First Nationwide incurred a loss of $55 million in 1993, compared with a loss of $81 million in 1992. The improvement resulted primarily from reduced borrowing costs, continued improvements in operating costs, a lower adjustment in 1993 to the carrying value of derivative securities and the gain on sale of certain branches. These factors were partially offset by lower levels of earning assets, lower yields from the reinvestment of FDIC
proceeds, and a reduction in income tax benefits.
First Nationwide's 1993 revenues included $72 million from the Federal Savings and Loan Insurance Corporation Resolution Fund (FSLIC/RF), compared with $221 million in 1992. These revenues represented reimbursements for losses or guaranteed yields on covered assets paid pursuant to First Nationwide's agreements with FSLIC/RF to acquire certain savings and loan institutions.
USL Capital earned a record $77 million in 1993, up $17 million from 1992. The improvement resulted primarily from higher earning assets and continued operating cost reductions. American Road earned $79 million in 1993, compared with $47 million in 1992. The increase resulted primarily from improved underwriting experience in extended service plan and floor plan products, partially offset by lower investment income.
LIQUIDITY AND CAPITAL RESOURCES
AUTOMOTIVE OPERATIONS
Cash and marketable securities of the Company's Automotive operations were $9,752 million at December 31, 1993, up $717 million from December 31, 1992. The Company paid $1,086 million in cash dividends on its capital stock during 1993. In 1993, the Company contributed $1 billion to its pension funds.
Automotive capital expenditures were $6.7 billion in 1993, up $1 billion from 1992. Over the last five years (1989 through 1993), the Company's worldwide capital spending totaled $32 billion. During the next several years, the pace of spending for product change at Ford will continue at similar or higher levels.
At December 31, 1993, Automotive debt totaled $8,016 million, which was 34% of total capitalization (stockholders' equity and Automotive debt), compared with $8,317 million, or 36% of total capitalization, at year-end 1992.
At December 31, 1993, Ford (parent company only) had long-term contractually committed credit agreements for use in the U.S. under which $4.8 billion is available from various banks at least through June 30, 1998. The entire $4.8 billion may be used, at Ford's option, by either Ford or Ford Credit. As of December 31, 1993, these facilities were unused.
Outside the U.S., Ford has additional long-term contractually committed credit-line facilities of approximately $2.4 billion. These facilities are available in varying amounts from 1994 through 1998; none had been utilized at December 31, 1993.
FINANCIAL SERVICES OPERATIONS
The Financial Services operations rely heavily on their ability to raise substantial amounts of funds in capital markets in addition to collections on loans and retained earnings. The levels of funds for certain Financial Services operations are affected by certain transactions with Ford, such as capital contributions, dividend payments and the timing of payments for income taxes. Their ability to obtain funds also is affected by their 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 agreements.
For information relating to Ford Credit's liquidity and capital resources, see "Business of Ford Credit - Borrowings and Other Sources of Funds" and Item 7. - "Management's Discussion and Analysis of Financial Condition and Results of Operations". In addition, at December 31, 1993, international subsidiaries and other credit operations managed by Ford Credit had $14.2 billion of support facilities available outside the U.S., approximately 44% of which were contractually committed. At December 31, 1993, approximately 42% of these support facilities outside the U.S. were in use.
First Nationwide's principal sources of funds include borrowings, collections on loans, proceeds from the sale of loans, and customers' deposits. In addition, the Federal Home Loan Bank System provides both short- and long-term alternative sources of funds. Other sources include the sale of mortgage pass-through securities and reverse repurchase agreements. Federal regulations require that an insured institution maintain certain regulatory capital requirements. New minimum regulatory capital standards were established in 1989 and will be phased in through 1994. First Nationwide Bank met all of the minimum capital requirements in effect at December 31, 1993.
At December 31, 1993, The Associates had contractually committed lines of credit with banks of $3.1 billion, with various maturities ranging from January 30, 1994 to December 31, 1994, none of which was utilized at December 31, 1993. Also, at December 31, 1993, The Associates had $4.1 billion of contractually committed revolving credit facilities with banks, with maturity dates ranging from February 1, 1994 through October 1, 1997, and $1 billion of contractually committed receivables sale facilities, $500 million of which are available through April 15, 1994 and $500 million of which are available through April 30, 1995; none of these facilities was in use at December 31, 1993. At December 31, 1993, foreign operations managed by The Associates had $195 million of support facilities available outside the U.S., approximately 64% of which were contractually committed. At December 31, 1993, about 15% of these support facilities outside the U.S. were in use.
At December 31, 1993, Ford Holdings had outstanding debt of $1.9 billion, all of which was long-term. All of the Ford Holdings debt held by nonaffiliated persons is guaranteed by Ford. Ford Holdings had no contractually committed lines of credit at December 31, 1993. In 1993, Ford Holdings sold 1,728 shares of its Series B Cumulative Preferred Stock having an aggregate liquidation preference of $173 million and 2,000 shares of its Series C Cumulative Preferred Stock having an aggregate liquidation preference of $200 million.
American Road's principal sources of funds are insurance premiums, annuity deposits and investment income. American Road had no debt or credit lines at December 31, 1993.
At December 31, 1993, USL Capital had $1.4 billion of contractually committed credit facilities, 70% of which are available through September 1998. These facilities included $200 million of contractually committed receivables sale facilities, of which about 86% were in use at December 31, 1993. At December 31, 1993, foreign operations managed by USL Capital had approximately $90 million of contractually committed support facilities available outside the U.S., of which about 75% were in use at December 31, 1993.
NEW ACCOUNTING STANDARDS
In November 1992, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits", which requires companies to account for employee benefits on an accrual basis for periods when employees are no longer actively employed but have not yet reached retirement. The effect on the Company's financial statements was not material.
In May 1993, the FASB issued SFAS 114, "Accounting by Creditors for Impairment of a Loan". The standard requires 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 does not plan to adopt this standard until January 1, 1995, and the effect is not expected to be material.
In May 1993, the FASB issued SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities". The standard establishes financial accounting and reporting requirements for investments in equity securities (excluding those accounted for under the equity method and investments in consolidated subsidiaries) that have readily determinable fair values and for all investments in debt securities. The Company has adopted this standard effective January 1, 1994, and the effect is not expected to be material.
ITEM 2.
ITEM 2. FORD CREDIT PROPERTIES
Substantially all of Ford Credit's branch operations presently are being conducted from leased properties. At December 31, 1993, Ford Credit's aggregate obligation under leases of real property was $52.2 million. In 1990, Ford Credit purchased from Ford its central office building in Dearborn, Michigan.
ITEM 3.
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.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All shares of the registrant's Common Stock are owned by Ford and, accordingly, there is no market for such stock. During 1993, Ford Credit declared and paid to Ford cash dividends of $250 million. Dividends also were paid to Ford in 1992 and 1991. Ford Credit may pay additional dividends from time to time depending on Ford Credit's receivables levels, capital requirements, and profitability.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
SELECTED INCOME STATEMENT DATA (IN MILLIONS)
* Includes income of American Road through September 30, 1989 ** Includes income of Ford Holdings for period October 1 - December 31, 1989
SELECTED BALANCE SHEET DATA (IN BILLIONS)
ITEM 7.
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, the levels of finance receivables and net investment in operating leases, and its investment in, and the profitability of, Ford Holdings.
Interest margins reflect the difference between interest rates earned on finance receivables and operating leases ("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
1993 COMPARED WITH 1992
Ford Credit's consolidated net income in 1993 was $1,194 million, up $155 million or 15% from 1992. Excluding a one-time gain resulting from the net effect of the adoption of new accounting standards for income taxes and postretirement benefits in 1992, net income was up $302 million or 34% from a year ago. The following comparison of 1993 results with 1992 results excludes the one-time net gain associated with the accounting changes.
Net income from financing operations was $996 million, up $259 million or 35% from the prior year. The increase in financing profits was more than accounted for by higher financing volumes, lower credit losses and higher net income from gains on sales of retail automotive receivables, partially offset by the increase in U. S. income taxes and lower net interest margins.
Lower credit losses reflect lower losses per repossession and fewer repossessions. Actual credit losses were $228 million (0.35% of average finance receivables including net investment in operating leases) compared with $343 million (0.60%) last year. Ford Credit released a portion of the loss reserves reflecting the continued improvement in actual credit loss experience. The credit loss coverage ratio for 1993 was 4.0 compared with 2.7 in the prior year. The decline in net interest margins, including depreciation on operating leases, reflects primarily the decline in net U.S. borrowing rates from 6.3% in 1992 to 5.3% in 1993, more than offset by lower yields on finance receivables and net investment in operating leases.
For 1993, equity in net income of affiliated companies (primarily Ford Holdings) was $198 million, up $43 million from 1992. The increase reflected higher Ford Holdings net income available to common shareholders, partially offset by a reduction in Ford Credit's ownership of Ford Holdings common stock in 1992 as discussed below. At December 31, 1993, Ford Credit owned about 45% of Ford Holdings common stock, representing about 34% of the voting power.
Total gross finance receivables and net investment in operating leases at December 31, 1993 were $69.6 billion, up $9.4 billion (16%) from a year earlier. The higher financing volume reflects primarily an increase in short-term operating leases and higher wholesale receivables. Depreciation expense on operating leases in 1993 was $2,676 million, up $1,023 million or 62% from 1992. The increase reflected the higher levels of operating leases and was more than offset by higher revenue earned on the lease contracts.
For 1993, Ford Credit financed 38.5% of all new cars and trucks sold by Ford Motor Company dealers in the U.S. compared with 37.7% in 1992. Ford Credit provided retail financing for 2,246,000 new and used vehicles in the United States. Ford Credit provided wholesale financing for 81.4% of Ford Motor Company U.S. factory sales in 1993 compared with 77.6% in 1992.
1992 COMPARED WITH 1991
Ford Credit's consolidated net income in 1992 was $1,039 million. Included in net income was a one-time net gain of $147 million that resulted from the adoption of new accounting standards for income taxes and postretirement benefits (principally retiree health care). Net income increased by $239 million for the tax accounting standard partially offset by a decrease in net income of $92 million for retiree health care. Excluding this one-time gain, Ford Credit earned net income of $892 million, up $143 million or 19% from $749 million earned in 1991. The following comparison of 1992 results with 1991 results excludes the one-time net gain associated with the accounting changes.
Net income from financing operations in 1992 was $737 million, up $179 million or 32% from 1991. The increase was more than accounted for by lower credit losses and higher net interest margins. Lower gains on sales of receivables were a partial offset.
The improvement in credit losses reflected fewer retail repossessions, a decline in loss per repossessed unit and reduced wholesale losses. Actual credit losses were $343 million (0.60% of average finance receivables including net investment in operating leases) compared with $529 million (0.92%) a year earlier. The credit loss coverage ratio for 1992 was 2.7 compared with 1.6 in 1991. The higher net interest margins reflected primarily a decline in Ford Credit's net average U.S. borrowing rate from 7.9%
in 1991 to 6.3% in 1992, partially offset by lower prime-based revenue.
For 1992, equity in net income of affiliated companies (primarily Ford Holdings) was $155 million compared with $191 million in 1991. The decline reflected lower Ford Holdings net income available to common shareholders and a reduction in Ford Credit's ownership of Ford Holdings common stock. The reduction in ownership was the result of a dividend paid in 1992 to Ford in the form of Ford Holdings common stock. At December 31, 1992, Ford Credit owned about 45% of Ford Holdings common stock, representing about 34% of the voting power.
Total gross finance receivables and net investment in operating leases at December 31, 1992 were $60.2 billion, up $3.6 billion or 6% from a year earlier. The increase reflected primarily higher levels of shorter-term operating leases. Depreciation expense on operating leases in 1992 was $1,653 million, up $622 million or 60% from 1991. The increase reflected the higher levels of operating leases and was more than offset by higher revenue earned on the lease contracts.
For 1992, Ford Credit financed 37.7% of all new cars and trucks sold by Ford Motor Company dealers in the U.S. compared with 35.2% in 1991. Ford Credit provided retail customers with financing for 1,871,000 new and used vehicles in the United States in 1992. Ford Credit provided wholesale financing for 77.6% of Ford Motor Company U.S. factory sales in 1992 compared with 74.9% in 1991.
NEW ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan". The standard requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. Ford Credit does not plan to adopt this standard until January 1, 1995, and the effect is not expected to be material.
In May 1993, the FASB also issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The standard establishes financial accounting and reporting requirements for investments in equity securities (excluding those accounted for under the equity method and investments in consolidated subsidiaries) that have readily determinable fair values and for all investments in debt securities. Ford Credit has adopted this standard effective January 1, 1994, and the effect is not expected to be material.
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", "Ford Holdings" and "Certain Transactions with Ford and Affiliates", and Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by Item 8 is set forth at pages FC-1 through FC-26 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.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Report of Independent Accountants
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, 1993, 1992 and 1991.
Consolidated Balance Sheet, December 31, 1993 and 1992.
Consolidated Statement of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991.
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-26 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
Schedule IX. Ford Motor Credit Company and Subsidiaries -- Short-Term Borrowings.
Schedules other than that indicated above 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
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, 1993, none of which contained financial statements:
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 WILLIAM E. ODOM* (William E. Odom, Chairman of the Board of Directors)
Date: March 28, 1994
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.
Ford Motor Credit Company and Subsidiaries
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of Ford Motor Credit Company:
We have audited the consolidated balance sheet of Ford Motor Credit Company and Subsidiaries at December 31, 1993 and 1992, 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, 1993 and the financial statement schedule listed in Item 14(a) of this Form 10-K. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
As discussed in Notes 2, 3 and 10 to the consolidated financial statements, the Company changed its methods of accounting for postretirement health care benefits and income taxes in 1992.
COOPERS & LYBRAND
Detroit, Michigan February 1, 1994
FC-1 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME AND OF EARNINGS RETAINED FOR USE IN THE BUSINESS
(in millions)
The accompanying notes are part of the financial statements.
FC-2 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions)
The accompanying notes are part of the financial statements.
FC-3 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
The accompanying notes are part of the financial statements.
FC-4 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 ("Ford Credit") and its majority-owned domestic and foreign subsidiaries and joint ventures. Affiliates that are 20-50 percent owned, principally Ford Holdings, Inc. ("Ford Holdings"), are included in the consolidated financial statements on an equity basis. Ford Credit is a wholly owned subsidiary of Ford Motor Company ("Ford").
Net unrealized gains on marketable equity securities reported in a separate component of stockholder's equity relate to Ford Credit's equity interest in Ford Holdings' insurance investment portfolio.
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 as scheduled payments become due.
Allowance for Credit Losses
Allowances for estimated credit losses are established as required based on historical experience. Other factors that affect collectibility also are evaluated and additional amounts may be provided. 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 the lower of the recorded investment in the receivable or its estimated fair value at the date of repossession. Any difference between the recorded investment in the receivable or lease and the actual sales price of the underlying collateral is charged to the allowance for credit losses. Recoveries on finance receivables and lease investments previously charged off as uncollectible are credited to the allowance for credit losses.
Continued
FC-5 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 1. ACCOUNTING POLICIES (continued)
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated 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.
Financial Statement Reclassifications
Certain amounts in prior year financial statements have been reclassified to conform with presentations adopted in 1993.
NOTE 2. EQUITY INVESTMENT IN FORD HOLDINGS
Ford Holdings' primary activities consist of consumer and commercial financing operations, insurance underwriting, and equipment leasing through its wholly owned subsidiaries, Associates First Capital Corporation, The American Road Insurance Company, and USL Capital Corporation (formerly United States Leasing International, Inc.).
In 1992 and 1991, Ford Credit transferred $200 million and $316 million, respectively, of Ford Holdings' common stock to Ford as dividends.
At December 31, 1993 and 1992, Ford Credit owned 45% of the common stock representing 33.8% of the voting power of Ford Holdings. Ford owns the remaining common stock representing 41.2% of the voting power. The balance of the voting power is represented by preferred stock owned by persons other than Ford or Ford Credit. At December 31, 1991, Ford Credit owned 54 percent of Ford Holdings' common stock.
Continued
FC-6 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 2. EQUITY INVESTMENT IN FORD HOLDINGS (continued)
Condensed financial information of Ford Holdings as of December 31 was as follows:
Ford Credit's equity in the net assets of Ford Holdings at December 31, 1993 and 1992 was $ 1,199 million and $1,002.6 million, respectively.
*Ford Credit's equity in Ford Holdings' cumulative effects of changes in accounting principles related to postretirement benefits and income taxes in the amount of $11.6 million is included in Ford Credit's 1992 cumulative effects of changes in accounting principles.
Continued
FC-7 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 3. 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 consisted of the following:
* Excludes the tax provision related to cumulative effects of changes in accounting principles.
Ford Credit adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), as of January 1, 1992. The cumulative effect of this change in accounting principle increased 1992 net income by $216.6 million. Financial statements for prior years were not restated to apply the provisions of SFAS No. 109.
Continued
FC-8 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 3. INCOME TAXES (continued)
Under SFAS No. 109, 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:
Deferred income taxes for 1991 were derived using the guidelines in Accounting Principles Board Opinion No. 11, "Accounting for Income Taxes" ("APB No. 11"). Under APB No. 11, deferred income taxes result from timing differences in the recognition of revenues and expenses between financial statements and tax returns. The principal sources of these differences and the related effect of each on Ford Credit's provision for income taxes were as follows:
Continued
FC-9 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 3. INCOME TAXES (continued)
A reconciliation of the provision for income taxes as a percentage of income before income taxes, excluding equity in net income of affiliated companies, with the United States statutory tax rate for the last three years is shown below:
*Excludes cumulative effects of changes in accounting principles.
Continued
FC-10 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 4. FINANCE RECEIVABLES
Finance receivables at December 31 were as follows:
Included in finance receivables is a total of $1.5 billion owed by three customers with the largest receivable balances. During 1993, Ford Credit issued irrevocable standby letters of credit in the amount of $223.5 million on behalf of one of these customers. A major portion of these amounts are guaranteed by Ford.
At December 31, 1993, other finance receivables primarily consisted of capital and other dealer loans.
The majority of retail receivables, a portion of diversified receivables and certain other finance receivables include finance charges that represent income to be earned in future periods. The remaining finance receivables only include principal.
The maturities of finance receivables outstanding at December 31, 1993 were as follows:
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.
Continued
FC-11 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:
Installments past-due less than 60 days included in finance receivables at December 31, 1993 and 1992 were $297.8 million and $231.1 million, respectively.
The average yield on net earning finance receivables and operating leases was as follows: 1993 - 13.4%; 1992 - 13.2%; 1991 - 13.0%.
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:
Minimum direct financing lease rentals (including executory costs of $50.5 million) for each of the five succeeding years are as follows (in millions): 1994 - $842.3; 1995 - $533.3; 1996 - $261.8; 1997 - $94.0; 1998 - $16.4; thereafter - $55.3.
Continued
FC-12 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 4. FINANCE RECEIVABLES (continued)
NOTE 5. NET INVESTMENT, OPERATING LEASES
Operating leases at December 31 were as follows:
Future minimum rentals on operating leases are as follows (in millions): 1994 - - - - - - - $3,346.2; 1995 - $1,632.6; 1996 - $226.4; 1997 - $7.1.
Depreciation expense on operating leases is provided for on a straight-line basis over the term of the lease and includes gains or losses upon disposal or impairment of the vehicle.
Continued
FC-13 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
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:
NOTE 7. OTHER ASSETS
Other assets consist of:
Continued
FC-14 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 8. DEBT
Debt at December 31 was as follows:
* Includes $150 million and $800 million with an affiliated company at December 31, 1993 and 1992, respectively.
Continued
FC-15 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 8. DEBT (continued)
Rates were variable on approximately 11.6 percent of the debt payable after one year including the effects of interest rate swap agreements.
The average amount of commercial paper outstanding during the past three years was as follows (in millions): 1993 - $22,683; 1992 - $19,358; 1991 - $19,078. The weighted average commercial paper interest rates per annum for these years were as follows: 1993 - 3.2%; 1992 - 4.2%; 1991 - 6.9%. The average remaining term of commercial paper was 28 days at December 31, 1993 and 1992.
The aggregate principal amounts of notes with terms of more than one year from dates of issue, maturing for each of the five succeeding years are as follows (in millions): 1994 - $7,882.6; 1995 - $4,662.6; 1996 - $6,260.6; 1997 - $2,065.6; 1998 - $6,561.1; thereafter - $5,977.4.
Included in debt at December 31, 1993 were obligations payable in foreign currencies: $2,348.6 million in Canadian dollars; $840.6 million in Australian dollars; $517.9 million in Japanese yen; $377.6 million in German deutsche marks; $220.7 million in Luxembourg francs; $156.4 million in Italian lire; $147.4 million in European currency units; and $136.6 million in Swiss francs. Certain of these obligations are denominated in currencies other than the currency of the country of the issuer. Foreign currency forward contracts are purchased and currency swaps are used to hedge exposure to changes in exchange rates of such obligations. These obligations are translated in the financial statements at the rates of exchange established under the related foreign currency forward contracts and currency swaps and would have been $64.7 million lower if translated at current exchange rates as of December 31, 1993.
The convertible subordinated debentures are convertible into common stock of Ford. Ford Credit has entered into an agreement with Ford to purchase from Ford the common stock required to effect conversion.
Continued
FC-16 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 9. SUPPORT FACILITIES
Support facilities represent additional sources of funds, if required. At January 1, 1994, Ford Credit had approximately $15.7 billion of contractually committed facilities for use in the United States, 83 percent of which are available through June 1998. These facilities included $12.8 billion of revolving credit agreements with banks (which included $4.8 billion of Ford bank lines that may be used either by Ford or Ford Credit at Ford's option) and $2.9 billion of agreements to sell retail receivables. At January 1, 1994, all of these U. S. facilities were unused.
Outside of the United States, an additional $1,185 million of facilities support borrowing operations in Canada, Australia and Puerto Rico, of which 82 percent are contractually committed and available through June 1998. Canadian facilities of $759 million included $210 million of Ford Motor Company of Canada Limited and Ford Ensite International Inc. lines which are available to Ford Credit Canada Limited at the option of these two companies. Australian facilities of $401 million included $155 million of Ford Motor Company of Australia Limited lines which are available to Ford Credit Australia Limited at the option of Ford Motor Company of Australia Limited. Ford Motor Credit Company of Puerto Rico, Inc. had $25 million in support facilities at January 1, 1994. Substantially all of these facilities were unused at January 1, 1994.
NOTE 10. 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. Prior to 1992, the expense recognized for postretirement health care benefits was based on actual expenditures for the year. Beginning in 1992, the estimated cost for postretirement health care benefits is accrued on an actuarially determined basis, in accordance with the requirements of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS No. 106"). Implementation of SFAS No. 106 has not increased Ford Credit's cash expenditures for postretirement benefits. Ford Credit elected to recognize immediately the prior-year unaccrued accumulated postretirement benefit obligation, resulting in an adverse effect on income of $81.7 million in the first quarter of 1992. The charge reflected an unaccrued retiree benefit obligation liability of $131.6 million, offset partially by projected tax benefits of $49.9 million.
Continued
FC-17 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 10. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS (continued)
Net postretirement benefit expense included the following (in millions):
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 1993 by $3.5 million and the accumulated postretirement benefit obligation at December 31, 1993 by $29.3 million.
Continued
FC-18 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 11. INDUSTRY SEGMENTS AND FOREIGN OPERATIONS
Ford Credit, its subsidiaries and affiliates operate 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 dealers associated with such dealers; loans to vehicle leasing companies; and diversified financing. In addition, a wholly owned subsidiary of Ford Credit provides these financing services in the U.S. to other vehicle dealers. Insurance operations conducted through Ford Credit's equity investment in Ford Holdings consist of: the issuance of single premium deferred annuities; property and casualty insurance relating to extended service plan contracts for new and used vehicles manufactured by affiliated and nonaffiliated companies, primarily originating from Ford dealers; credit life and credit disability insurance for retail purchasers of vehicles and equipment; and physical damage insurance covering vehicles and equipment financed at wholesale by Ford Credit and its subsidiaries.
Ford Credit, through certain of its subsidiaries, operates in several foreign countries, the most significant of which are Canada and Australia. Total revenue, income before income taxes and cumulative effects of changes in accounting principles, and assets identifiable with United States and foreign operations were as follows:
Continued
FC-19 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
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 1993, 1992, or 1991.
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 $1,076.9 million at December 31, 1993 and $948.0 million at December 31, 1992. Agreements with Ford also provide for payment to Ford Credit for interest supplements and other support costs on certain financing and leasing transactions. Amounts included in total revenue from these and other transactions with Ford were as follows (in millions): 1993 - $583.0; 1992 - $622.8; 1991 - $618.9. 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 cost of these vehicles held for resale and included in other assets at December 31 was as follows (in millions): 1993 - $456.5; 1992 - $368.1. 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 lease vehicles included in operating leases at December 31 was as follows (in millions): 1993 - $562.3; 1992 - $501.3.
Investments in securities include preferred stock of a nonaffiliate ($324 million) and of an affiliate ($335.9 million) which were acquired from Ford. Investments in these securities are recorded at cost. Ford has provided Ford Credit with certain guarantees related to Ford Credit's initial investment and return on investment in this preferred stock, and for certain related finance receivables. Amounts related to these transactions included in investment and other income were as follows (in millions): 1993 - $52.7; 1992 - $47.2; 1991 - - - - - - - $57.2.
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 services are charged to operating expenses and were as follows (in millions): 1993 - $57.1; 1992 - $53.6; 1991 - $59.4.
Continued
FC-20 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 12. TRANSACTIONS WITH AFFILIATED COMPANIES (continued)
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 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): 1993 - $5.8; 1992 - $6.1; 1991 - $11.0.
At December 31, 1993 and 1992, Ford Credit had guaranteed $94.6 million and $81.0 million of debt outstanding of other subsidiaries of Ford.
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, 1993 with respect to these matters cannot be ascertained, Ford Credit believes that any resulting liability should not materially affect the consolidated financial position of Ford Credit and its subsidiaries at December 31, 1993.
Continued
FC-21 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:
CASH AND CASH EQUIVALENTS. The book value approximates fair value because of the short maturity of these instruments.
INVESTMENTS IN SECURITIES. Investments in securities include common stock of a nonaffiliate, preferred stock of an affiliate and a nonaffiliate which were acquired from Ford, and subordinated retained interests in receivable sales. At December 31, 1993, the formula determined fair value of the common stock exceeded its book value by $58.5 million. Preferred stock is recorded at cost, which approximates fair value, as Ford provides Ford Credit with certain guarantees related to Ford Credit's initial investment and return on investment. Subordinated retained interests in receivable sales are recorded at the present value of estimated future cash flows discounted at rates commensurate with this type of instrument, which approximates fair value.
FINANCE RECEIVABLES. The fair value of most receivables is estimated by discounting future cash flows using an estimated discount rate which reflects the 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, and other miscellaneous accounts receivable.
DEBT. The fair value is estimated based on quoted market prices or on current rates for similar debt with the same remaining maturities.
Continued
FC-22 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 held as of December 31, 1993 and 1992. Also included is a brief discussion of the 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 exchange agreements to manage exposure to foreign exchange rate fluctuations. These exchange agreements hedge principal and interest payments on debt that are denominated in foreign currencies. Agreements entered into to manage these exposures include foreign currency forward contracts and currency swaps.
Foreign currency forward contracts and currency swaps involve agreements to purchase or sell specified amounts of foreign currencies at specified rates on specific future dates.
The fair value of these foreign exchange agreements was estimated using current market rates. The fair value was estimated to be a net receivable of $54.1 million at December 31, 1993 and $107.2 million at December 31, 1992.
In the unlikely event that a counterparty fails to meet the terms of the contract, Ford Credit's market risk is limited to the currency rate differential. In the case of currency swaps, Ford Credit's market risk also may include an interest rate differential. At December 31, 1993 and 1992, the total notional amount of Ford Credit's foreign currency forward contracts and currency swaps outstanding was $2.1 billion.
INTEREST RATE INSTRUMENTS. Ford Credit and certain of its subsidiaries have entered into arrangements to manage exposure to fluctuations in interest rates. These arrangements include primarily interest rate swap agreements and, to a lesser extent, interest rate options.
Continued
FC-23 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 14. FINANCIAL INSTRUMENTS (continued)
Interest rate swap agreements involve the exchange of interest obligations on fixed and floating interest rate debt without the exchange of the underlying principal amounts. The differential paid or received on interest rate swap agreements is recognized as an adjustment to interest expense over the term of the underlying debt agreement.
Interest rate option contracts allow the holder of the option to purchase or sell a financial instrument at a specified price and within a specified period of time.
The fair value of interest rate instruments is the estimated amount Ford Credit would receive or pay to terminate the agreement or contract. The fair value is calculated using current market rates and the remaining terms of the agreements or contracts. At December 31, 1993 and 1992, the fair value of these interest rate instruments was estimated to be $458.2 million and $273.4 million, respectively, including unrealized gains of $410.6 million and $221.5 million, respectively.
In the unlikely event that a counterparty fails to meet the terms of an interest rate instrument, Ford Credit's exposure is limited to the interest rate differential. The underlying notional amount on which Ford Credit has interest rate swap and option agreements outstanding aggregated $31.1 billion at December 31, 1993 and $16.9 billion at December 31, 1992.
Concentrations of Credit Risk
Ford Credit controls its credit risk through credit standards, limits on exposure and by monitoring the financial conditions of other parties. The majority of Ford Credit's finance receivables are geographically diversified throughout the United States. Foreign finance receivables are concentrated in Canada and Australia.
Continued
FC-24 FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial data by calendar quarter for the past two years were as follows:
____________ * The provision for credit losses for the fourth quarter of 1993 was reduced by $78.8 million as a result of continued improvement in credit loss experience.
FC-25 SCHEDULE IX
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
SCHEDULE IX--SHORT-TERM BORROWINGS(1)
FOR THE YEARS 1993, 1992 AND 1991
__________ (1) U.S. commercial paper, the majority of commercial paper outstanding, is comprised of short-term, unsecured promissory notes with maturities ranging from one day to 270 days. Borrowings under short-term borrowing agreements (STBAs) are payable on demand. Bank debt outstandings range from short-term borrowings to bank notes payable on specific dates. (2) The average amount outstanding during the period represents the daily average debt outstanding. (3) The weighted average interest rate represents total annual short-term interest expense divided by the daily average debt outstanding. (4) Other short-term debt primarily consists of notes having either a provision for optional redemption within one year or original maturities of less than one year, and for 1993 and 1992 excludes $150 million and $800 million, respectively, due to an affiliated company.
FC-26
EXHIBIT INDEX