F

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2003, for Ford Motor Company. The report details the financial performance of the company's two primary sectors: Automotive (design, manufacture, and sale of vehicles) and Financial Services (Ford Credit and Hertz). Beginning in 2003, the Automotive sector results are reported as two segments: North America and International. The financial statements are unaudited but reviewed by PricewaterhouseCoopers LLP.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income for Q2 2003 decreased by $153 million (27%) compared to Q2 2002, primarily due to a $400 million decline in Automotive pre-tax income. However, the First Half 2003 turned a significant profit ($1.31 billion) compared to a loss of $524 million in the same period of 2002, driven by a $1.002 billion cumulative effect of a change in accounting principle in 2002 and improved cost performance.
• Revenue: Total sales declined $1.5 billion in Q2 2003 due to lower unit sales (down 137,000 units) and lower net pricing. Automotive sales dropped to $34.2 billion from $35.2 billion.
• Segment Performance:
  • North America Automotive: Pre-tax income fell $476 million to $445 million due to lower volume and pricing, partially offset by cost reductions.
  • International Automotive: Losses widened to $411 million (from $371 million), driven by a $525 million loss in Ford Europe due to lower pricing and volume.
  • Premier Automotive Group (PAG): Turned a profit of $166 million, a $288 million improvement from a loss in 2002, aided by new model launches (Volvo XC90, Jaguar XJ).
  • Financial Services: Pre-tax income rose $115 million to $715 million, driven by Ford Credit's lower provision for credit losses and higher income from receivables sales.
• Accounting Changes: Ford Credit consolidated the FCAR Owner Trust in Q2 2003, increasing reported debt-to-equity ratios but not materially impacting earnings. The company also adopted SFAS No. 123 for stock-based compensation, though the pro forma impact on Q2 2003 net income was negligible.

Guidance, Outlook, and Risks

• 2003 Outlook: Management expects a loss of approximately $0.15 per share for the third quarter of 2003. Full-year 2003 earnings are projected at $0.70 per share.
• Production & Volume: Projected vehicle production for Q3 2003 is lower than Q3 2002 due to model-year changeovers (e.g., F-150, Freestar) and lower industry volume assumptions in Europe (revised down to 16.3 million units).
• Costs & Pricing: Full-year cost reductions are expected to be about $2.5 billion. Net pricing is expected to be negative for the full year in the U.S. and Europe due to high competitive incentives, though H2 pricing is expected to improve.
• Key Risks:
  • Greater price competition and industry overcapacity in the U.S. and Europe.
  • Significant decline in industry sales due to economic slowdowns.
  • Work stoppages or supply interruptions.
  • Increased warranty costs or product recalls.
  • Currency fluctuations and higher fuel prices.
  • Legal proceedings, including Firestone tire litigation and various class actions (e.g., Seat Back, Crown Victoria).

Investor Verification Checklist

• FCAR Consolidation Impact: Verify the long-term implications of the FCAR consolidation on Ford Credit's leverage ratios and off-balance sheet receivables reporting.
• European Operations: Assess the sustainability of Ford Europe's losses ($525 million in Q2) amidst lower industry volume and pricing pressure.
• Cost Reduction Targets: Monitor the execution of the $2.5 billion full-year cost reduction plan and the 10% reduction in salaried personnel costs.
• Legal Contingencies: Review the status of the Firestone class action settlements and the Romo v. Ford Supreme Court remand for potential liability exposure.
• Debt Maturity: Confirm the adequacy of liquidity given Ford Credit's $146.2 billion debt load and the upcoming reclassification of trust preferred securities as debt under SFAS 150.