Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2006, for Ford Motor Company. The filing includes a significant restatement of prior period financial data (specifically the third quarter and first nine months of 2005) due to a review of the application of SFAS No. 133 regarding interest rate swaps at Ford Credit. The company is currently executing an accelerated "Way Forward" restructuring plan to reduce costs and align capacity.
Key Financial Metrics
| Metric | Q3 2006 | Q3 2005 (Restated) | 9M 2006 | 9M 2005 (Restated) |
|---|---|---|---|---|
| Total Sales and Revenues | $37.1 billion | $40.5 billion | $119.8 billion | $130.6 billion |
| Net Income/(Loss) | $(5.2) billion | $(0.6) billion | $(7.0) billion | $1.5 billion |
| Net Income/(Loss) Per Share (Diluted) | $(2.79) | $(0.31) | $(3.73) | $0.79 |
| Operating Cash Flow (9M) | $17.0 billion (2006) vs $19.3 billion (2005 Restated) | |||
| Total Debt | $154.4 billion (as of Sept 30, 2006) | |||
| Cash and Cash Equivalents | $25.5 billion (as of Sept 30, 2006) | |||
| Stockholders' Equity | $9.2 billion (as of Sept 30, 2006) |
Material Changes vs. Prior Period
- Restatement Impact: Previously reported 2005 results were restated to reflect derivative losses on interest rate swaps that did not qualify for hedge accounting. This reduced 2005 Q3 net income from a reported loss of $284 million to a restated loss of $576 million, and reduced 9M 2005 net income from $1.87 billion to $1.51 billion.
- Automotive Sector Losses: The Automotive sector reported a pre-tax loss of $7.1 billion in Q3 2006, compared to $1.6 billion in Q3 2005. This deterioration was driven by significant special items and operational challenges.
- Financial Services: Ford Credit remained profitable with pre-tax income of $750 million in Q3 2006, up slightly from $714 million in Q3 2005, despite the absence of Hertz (sold in late 2005).
- Market Share: U.S. market share declined to 15.5% in Q3 2006 from 17.5% in Q3 2005.
Guidance, Outlook, and Risks
Management Commentary and Special Items
The Q3 2006 results were heavily impacted by special items totaling approximately $5.3 billion, including:
- Asset Impairments: $2.2 billion charge for Ford North America long-lived assets and $1.6 billion for Jaguar/Land Rover operations.
- Restructuring Costs: Approximately $861 million for Jobs Bank Benefits and voluntary terminations related to the accelerated "Way Forward" plan.
- Pension Curtailments: $437 million in charges related to employee actions under the restructuring plan.
Outlook
- Profitability: Management does not expect full-year profitability in North American Automotive operations before 2009. Q4 2006 results are expected to be worse than Q3.
- Production: North American production is projected to be down 8% to 12% in the first half of 2007 due to the cessation of Taurus and Freestar production.
- Liquidity: Automotive gross cash is projected to be approximately $20 billion at year-end. The company is exploring secured financing strategies to fund negative operating cash flows expected through 2008.
- Special Items (Full Year 2006): Projected to range from $9.5 billion to $10.5 billion.
Risks and Contingencies
- Credit Ratings: Ford's credit ratings have been downgraded by major agencies (S&P, Moody's, Fitch, DBRS) to "B" or "B+" levels with negative outlooks, increasing borrowing costs and restricting access to unsecured debt markets.
- Accounting Changes: Adoption of SFAS No. 158 is expected to reduce year-end Stockholders' equity by approximately $15 billion.
- Legal Proceedings: Ongoing environmental litigation regarding global warming emissions in California and other states.
Investor Verification Checklist
- Restatement Details: Verify the specific impact of the SFAS 133 restatement on 2005 comparables and the current status of derivative hedging policies.
- Liquidity Strategy: Review the specifics of the "secured financing" strategies being explored to fund the projected negative cash flow through 2008.
- Restructuring Execution: Monitor the progress of the "Way Forward" plan, specifically the idling of facilities and the acceptance rates of voluntary separation packages.
- Credit Rating Impact: Assess the ongoing impact of credit rating downgrades on Ford Credit's ability to securitize assets and fund operations.
- Asset Impairments: Confirm the assumptions used for the $3.8 billion in impairment charges (Ford North America and Jaguar/Land Rover) and whether further impairments are likely.