F

Business Context and Reporting Period

Company: Ford Motor Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Overview: Ford is a global producer of cars, trucks, and financial services. The company operates two primary sectors: Automotive (manufacturing and sales) and Financial Services (Ford Credit). In 2006, Ford sold approximately 6.6 million vehicles worldwide. The company is in the midst of a major restructuring plan ("Way Forward") to reduce costs, align capacity with demand, and improve profitability in a highly competitive global market characterized by excess capacity and pricing pressure.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Loss: The company reported a net loss of $12.6 billion in 2006, a deterioration of approximately $14 billion from the $1.4 billion profit in 2005. This was driven primarily by a massive pre-tax loss in the Automotive sector.
• Automotive Sector Performance: The Automotive sector reported a pre-tax loss of $17.0 billion in 2006 compared to a $3.9 billion loss in 2005. Key drivers included:
  • Special Items: Approximately $11.9 billion in special charges, including $4.8 billion for "Jobs Bank Benefits" (guaranteed employment costs for idled plants), $2.7 billion for pension curtailment charges, and $3.8 billion in fixed asset impairment charges (primarily Ford North America and Jaguar/Land Rover).
  • Volume and Mix: Wholesale unit volumes declined 3% globally, with a significant 11% drop in Ford North America. Market share in the U.S. declined to 17.1% (down from 18.2% in 2005).
  • Pricing: Unfavorable net pricing and high marketing incentives impacted margins.
• Financial Services Sector: Pre-tax income dropped to $2.0 billion from $5.0 billion in 2005. This decline was largely due to the sale of Hertz in late 2005 (which contributed $1.1 billion in gain in 2005 but no comparable gain in 2006), higher borrowing costs, and lower average receivable levels.
• Equity: Stockholders' equity turned negative ($3.5 billion deficit) due to the 2006 net loss and the adoption of SFAS No. 158, which required the immediate recognition of underfunded pension and postretirement benefit obligations.

Guidance, Outlook, and Risks

• Restructuring Plan: Ford accelerated its "Way Forward" plan, targeting a $5 billion reduction in annual North American operating costs by the end of 2008. This includes eliminating 14,000 salaried positions and idling 16 North American manufacturing facilities by 2012.
• Liquidity: In December 2006, Ford secured $23.5 billion in new liquidity (convertible debt, secured term loan, and revolving credit facility), bringing total automotive liquidity to approximately $46 billion. Management expects cumulative Automotive operating-related cash outflows of about $10 billion and restructuring expenditures of $7 billion from 2007 through 2009.
• 2007 Outlook: Management anticipates that 2007 will remain challenging. While special items are expected to be significantly lower ($1-2 billion), the company expects to incur a substantial loss in the Automotive sector, though improved from 2006. Ford Credit is expected to report substantially lower profits due to higher borrowing costs and the suspension of regular dividends.
• Key Risks:
  • Market Share: Continued decline in U.S. market share and a shift in consumer preference away from profitable trucks/SUVs toward smaller, less profitable vehicles.
  • Legacy Costs: Substantial pension and postretirement healthcare liabilities impairing liquidity.
  • Competition: Intense price competition driven by global industry overcapacity.
  • Regulatory: Increasingly stringent emissions and fuel economy standards (CAFE) and potential greenhouse gas regulations.

Important Facts for Investor Verification

• Dividend Suspension: Ford suspended cash dividends on Common and Class B stock effective December 2006 due to covenants in its new secured credit facility.
• Debt Structure: Verify the terms of the $11.5 billion secured revolving credit facility and the $7 billion term loan, including the borrowing base covenant and restrictions on dividends.
• Pension Funding: Monitor the funded status of defined benefit pension plans and the impact of SFAS No. 158 on future cash flow requirements for contributions.
• Asset Impairments: Review the specific assets written down in the $3.8 billion impairment charge (Ford North America and PAG) to assess future depreciation and operational capacity.
• Jobs Bank Benefits: Track the actual utilization of the $1 billion reserve for "Jobs Bank Benefits" and the number of employees accepting voluntary separation packages versus remaining on the guaranteed employment list.