UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 For the transition period from to
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Commission file number 1-3950
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FORD MOTOR COMPANY
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(Exact name of registrant as specified in its charter)
Incorporated in Delaware 38-0549190
-------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One American Road, Dearborn, Michigan 48126
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 313-322-3000
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Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| . No .
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| . No .
---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date: As of July 28, 2004 the Registrant had outstanding 1,758,935,347 shares
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of Common Stock and 70,852,076 shares of Class B Stock.
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Exhibit index located on sequential page number 34
Part I. Financial Information
Item 1. Financial Statements
Ford Motor Company and Subsidiaries
SECTOR STATEMENT OF INCOME
--------------------------
For the Periods Ended June 30, 2004 and 2003
(in millions, except per share amounts)
Second Quarter First Half
------------------------- ---------------------------
2004 2003 2004 2003
----------- ------------- ------------- -------------
(unaudited) (unaudited)
AUTOMOTIVE
Sales $36,719 $34,142 $75,563 $68,301
Costs and expenses
Cost of sales 33,834 31,660 67,905 62,715
Selling, administrative and other expenses 2,842 2,456 5,590 4,754
------- ------- ------- -------
Total costs and expenses 36,676 34,116 73,495 67,469
------- ------- ------- -------
Operating income/(loss) 43 26 2,068 832
Interest income 128 134 245 282
Interest expense 312 229 704 542
------- -------- ------- ------
Net interest income/(expense) (184) (95) (459) (260)
Equity in net income/(loss) of affiliated companies 84 72 140 93
------- -------- ------- ------
Income/(loss) before income taxes - Automotive (57) 3 1,749 665
FINANCIAL SERVICES
Revenues 6,083 6,440 11,930 13,096
Costs and expenses
Interest expense 1,422 1,598 2,872 3,242
Depreciation 1,661 2,255 3,392 4,808
Operating and other expenses 1,259 1,193 2,471 2,381
Provision for credit and insurance losses 182 679 553 1,272
------- ------- ------- -------
Total costs and expenses 4,524 5,725 9,288 11,703
------- ------- ------- -------
Income/(loss) before income taxes - Financial Services 1,559 715 2,642 1,393
------- ------- ------- -------
TOTAL COMPANY
Income/(loss) before income taxes 1,502 718 4,391 2,058
Provision for/(benefit from) income taxes 268 194 1,097 531
------- ------- ------- -------
Income/(loss) before minority interests 1,234 524 3,294 1,527
Minority interests in net income/(loss) of subsidiaries 72 98 157 200
------- ------- ------- -------
Income/(loss) from continuing operations 1,162 426 3,137 1,327
Income/(loss) from discontinued/held-for-sale operations 3 (9) (20) (14)
------- ------- ------- -------
Net income/(loss) $ 1,165 $ 417 $ 3,117 $ 1,313
======= ======= ======= =======
Average number of shares of Common and Class B
Stock outstanding 1,831 1,832 1,832 1,832
AMOUNTS PER SHARE OF COMMON AND CLASS B STOCK (Note 7)
Basic income/(loss)
Income/(loss) from continuing operations $ 0.64 $ 0.23 $ 1.72 $ 0.72
Income/(loss) from discontinued/held-for-sale operations - - (0.01) -
------- ------- ------- -------
Net income/(loss) $ 0.64 $ 0.23 $ 1.71 $ 0.72
======= ======= ======= =======
Diluted income/(loss)
Income/(loss) from continuing operations $ 0.57 $ 0.22 $ 1.52 $ 0.67
Income/(loss) from discontinued/held-for-sale operations - - (0.01) -
------- ------- ------- -------
Net income/(loss) $ 0.57 $ 0.22 $ 1.51 $ 0.67
======= ======= ======= =======
Cash dividends $ 0.10 $ 0.10 $ 0.20 $ 0.20
The accompanying notes are part of the financial statements.
2
Item 1. Financial Statements (Continued)
Ford Motor Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
For the Periods Ended June 30, 2004 and 2003
(in millions, except per share amounts)
Second Quarter First Half
------------------------- ---------------------------
2004 2003 2004 2003
----------- ------------- ------------ --------------
(unaudited) (unaudited)
Sales and revenues
Automotive sales $36,719 $34,142 $75,563 $68,301
Financial Services revenue 6,083 6,440 11,930 13,096
------- ------- ------- -------
Total sales and revenues 42,802 40,582 87,493 81,397
Automotive interest income 128 134 245 282
Costs and expenses
Cost of sales 33,834 31,660 67,905 62,715
Selling, administrative and other expenses 5,762 5,904 11,453 11,943
Interest expense 1,734 1,827 3,576 3,784
Provision for credit and insurance losses 182 679 553 1,272
------- ------- ------- -------
Total costs and expenses 41,512 40,070 83,487 79,714
Automotive equity in net income/(loss)
of affiliated companies 84 72 140 93
------- ------- ------- -------
Income/(loss) before income taxes 1,502 718 4,391 2,058
Provision for/(benefit from) income taxes 268 194 1,097 531
------- ------- ------- -------
Income/(loss) before minority interests 1,234 524 3,294 1,527
Minority interests in net income/(loss) of subsidiaries 72 98 157 200
------- ------- ------- -------
Income/(loss) from continuing operations 1,162 426 3,137 1,327
Income/(loss) from discontinued/held-for-sale operations 3 (9) (20) (14)
------- ------- ------- -------
Net income/(loss) $ 1,165 $ 417 $ 3,117 $ 1,313
======= ======= ======= =======
Average number of shares of Common and Class B
Stock outstanding 1,831 1,832 1,832 1,832
AMOUNTS PER SHARE OF COMMON AND CLASS B STOCK
Basic income/(loss)
Income/(loss) from continuing operations $ 0.64 $ 0.23 $ 1.72 $ 0.72
Income/(loss) from discontinued/held-for-sale operations - - (0.01) -
------- ------- ------- -------
Net income/(loss) $ 0.64 $ 0.23 $ 1.71 $ 0.72
======= ========= ======== =======
Diluted income/(loss)
Income/(loss) from continuing operations $ 0.57 $ 0.22 $ 1.52 $ 0.67
Income/(loss) from discontinued/held-for-sale operations - - (0.01) -
------- ------- ------- -------
Net income/(loss) $ 0.57 $ 0.22 $ 1.51 $ 0.67
======= ======= ======= =======
Cash dividends $ 0.10 $ 0.10 $ 0.20 $ 0.20
The accompanying notes are part of the financial statements.
3
Item 1. Financial Statements (Continued)
Ford Motor Company and Subsidiaries
SECTOR BALANCE SHEET
--------------------
(in millions)
June 30, December 31,
2004 2003
-------------- ---------------
(unaudited)
ASSETS
Automotive
Cash and cash equivalents $ 5,937 $ 5,427
Marketable securities 11,537 10,749
Loaned securities 5,317 5,667
-------- --------
Total cash, marketable and loaned securities 22,791 21,843
Receivables, net 3,016 2,721
Inventories (Note 2) 10,614 9,181
Deferred income taxes 3,083 3,225
Other current assets 8,166 6,839
-------- --------
Total current assets 47,670 43,809
Equity in net assets of affiliated companies 1,897 1,930
Net property 40,680 41,993
Deferred income taxes 10,640 12,092
Goodwill and other intangible assets (Note 3) 6,187 6,254
Assets of discontinued/held-for-sale operations 2 68
Other assets 15,417 14,495
-------- --------
Total Automotive assets 122,493 120,641
Financial Services
Cash and cash equivalents 9,711 16,343
Investments in securities 1,156 1,123
Finance receivables, net 108,459 110,893
Net investment in operating leases 32,412 31,859
Retained interest in sold receivables 16,396 13,017
Goodwill and other intangible assets (Note 3) 999 1,008
Assets of discontinued/held-for-sale operations 385 388
Other assets 12,067 17,292
Receivable from Automotive 3,016 3,356
-------- --------
Total Financial Services assets 184,601 195,279
-------- --------
Total assets $307,094 $315,920
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Automotive
Trade payables $ 15,947 $ 15,289
Other payables 3,547 2,942
Accrued liabilities 35,415 32,171
Debt payable within one year 760 1,806
Current payable to Financial Services 598 124
-------- --------
Total current liabilities 56,267 52,332
Senior debt 12,987 13,832
Subordinated debt 5,155 5,155
-------- --------
Total long-term debt 18,142 18,987
Other liabilities 43,184 45,104
Deferred income taxes 1,652 2,352
Liabilities of discontinued/held-for-sale operations 21 94
Payable to Financial Services 2,418 3,232
-------- --------
Total Automotive liabilities 121,684 122,101
Financial Services
Payables 2,385 2,189
Debt 149,199 159,011
Deferred income taxes 11,010 11,061
Other liabilities and deferred income 8,379 9,211
Liabilities of discontinued/held-for-sale operations 91 37
-------- --------
Total Financial Services liabilities 171,064 181,509
Minority interests 785 659
Stockholders' equity
Capital stock
Common Stock, par value $0.01 per share (1,837 million shares issued) 18 18
Class B Stock, par value $0.01 per share (71 million shares issued) 1 1
Capital in excess of par value of stock 5,341 5,374
Accumulated other comprehensive income/(loss) (1,209) (414)
Treasury stock (1,761) (1,749)
Earnings retained for use in business 11,171 8,421
-------- --------
Total stockholders' equity 13,561 11,651
-------- --------
Total liabilities and stockholders' equity $307,094 $315,920
======== ========
The accompanying notes are part of the financial statements.
4
Item 1. Financial Statements (Continued)
Ford Motor Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
--------------------------
(in millions)
June 30, December 31,
2004 2003
--------------- -------------
(unaudited)
ASSETS
Cash and cash equivalents $ 15,648 $ 21,770
Marketable securities 12,693 11,872
Loaned securities 5,317 5,667
Receivables, net 3,016 2,721
Finance receivables, net 108,459 110,893
Net investment in operating leases 32,412 31,859
Retained interest in sold receivables 16,396 13,017
Inventories 10,614 9,181
Equity in net assets of affiliated companies 2,867 2,959
Net property 42,325 43,598
Deferred income taxes 3,242 7,389
Goodwill and other intangible assets 7,186 7,262
Assets of discontinued/held-for-sale operations 387 456
Other assets 33,051 35,950
-------- --------
Total assets $293,613 $304,594
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables $ 21,879 $ 20,420
Accrued liabilities 32,773 29,591
Debt 168,101 179,804
Other liabilities and deferred income 51,566 53,899
Deferred income taxes 4,836 8,439
Liabilities of discontinued/held-for-sale operations 112 131
-------- --------
Total liabilities 279,267 292,284
Minority interests 785 659
Stockholders' equity
Capital stock
Common Stock, par value $0.01 per share (1,837 million shares issued) 18 18
Class B Stock, par value $0.01 per share (71 million shares issued) 1 1
Capital in excess of par value of stock 5,341 5,374
Accumulated other comprehensive income/(loss) (1,209) (414)
Treasury stock (1,761) (1,749)
Earnings retained for use in business 11,171 8,421
-------- --------
Total stockholders' equity 13,561 11,651
-------- --------
Total liabilities and stockholders' equity $293,613 $304,594
======== ========
The accompanying notes are part of the financial statements.
5
Item 1. Financial Statements (Continued)
Ford Motor Company and Subsidiaries
CONDENSED SECTOR STATEMENT OF CASH FLOWS
----------------------------------------
For the Periods Ended June 30, 2004 and 2003
(in millions)
First Half 2004 First Half 2003
---------------------------- -----------------------------
Financial Financial
Automotive Services Automotive Services
------------ --------------- ------------- ---------------
(unaudited) (unaudited)
Cash and cash equivalents at January 1 $ 5,427 $ 16,343 $ 5,157 $ 7,064
Cash flows from operating activities before
securities trading 3,592 9,850 5,741 8,403
Net sales/(purchases) of trading securities (392) (31) 10 (380)
-------- -------- -------- --------
Net cash flows from operating activities 3,200 9,819 5,751 8,023
Cash flows from investing activities
Capital expenditures (2,601) (189) (3,415) (118)
Acquisitions of receivables and lease investments - (33,037) - (28,920)
Collections of receivables and lease investments - 23,156 - 18,800
Net acquisitions of daily rental vehicles - (2,902) - (1,545)
Purchases of securities (5,593) (433) (4,255) (319)
Sales and maturities of securities 5,312 391 2,093 376
Proceeds from sales of receivables
and lease investments - 5,370 - 13,573
Proceeds from sale of businesses 125 - 77 204
Repayment of debt from discontinued operations - - - 1,421
Net investing activity with Financial Services 1,832 - 1,867 -
Cash paid for acquisitions (30) - - -
Other 17 50 489 (38)
-------- -------- -------- --------
Net cash (used in)/provided by investing activities (938) (7,594) (3,144) 3,434
Cash flows from financing activities
Cash dividends (366) - (366) -
Net sales/(purchases) of Common Stock (101) - (3) -
Changes in short-term debt (267) 8,679 (113) (2,340)
Proceeds from issuance of other debt 289 7,542 825 7,720
Principal payments on other debt (1,729) (22,672) (548) (12,395)
Net financing activity with Automotive - (1,832) - (1,867)
Other (15) 8 (5) 48
-------- -------- -------- --------
Net cash (used in)/provided by financing activities (2,189) (8,275) (210) (8,834)
Effect of exchange rate changes on cash (37) (108) 175 240
Net transactions with Automotive/Financial Services 474 (474) (267) 267
-------- -------- -------- --------
Net increase/(decrease) in cash and cash equivalents 510 (6,632) 2,305 3,130
-------- -------- -------- --------
Cash and cash equivalents at June 30 $ 5,937 $ 9,711 $ 7,462 $ 10,194
======== ======== ======== ========
The accompanying notes are part of the financial statements.
6
Item 1. Financial Statements (Continued)
Ford Motor Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
----------------------------------------------
For the Periods Ended June 30, 2004 and 2003
(in millions)
First Half
-------------------------------
2004 2003
-------------- ----------------
(unaudited)
Cash and cash equivalents at January 1 $ 21,770 $ 12,221
Cash flows from operating activities before securities trading 13,442 14,144
Net sales/(purchases) of trading securities (423) (370)
-------- --------
Net cash flows from operating activities 13,019 13,774
Cash flows from investing activities
Capital expenditures (2,790) (3,533)
Acquisitions of receivables and lease investments (33,037) (28,920)
Collections of receivables and lease investments 23,156 18,800
Net acquisitions of daily rental vehicles (2,902) (1,545)
Purchases of securities (6,026) (4,574)
Sales and maturities of securities 5,703 2,469
Proceeds from sales of receivables and lease investments 5,370 13,573
Proceeds from sale of businesses 125 281
Repayment of debt from discontinued operations - 1,421
Cash paid for acquisitions (30) -
Other 67 451
-------- --------
Net cash (used in)/provided by investing activities (10,364) (1,577)
Cash flows from financing activities
Cash dividends (366) (366)
Net sales/(purchases) of Common Stock (101) (3)
Changes in short-term debt 8,412 (2,453)
Proceeds from issuance of other debt 7,831 8,545
Principal payments on other debt (24,401) (12,943)
Other (7) 43
-------- --------
Net cash (used in)/provided by financing activities (8,632) (7,177)
Effect of exchange rate changes on cash (145) 415
-------- --------
Net increase/(decrease) in cash and cash equivalents (6,122) 5,435
-------- --------
Cash and cash equivalents at June 30 $ 15,648 $ 17,656
======== ========
The accompanying notes are part of the financial statements.
7
Item 1. Financial Statements (Continued)
Ford Motor Company and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
---------------------------------
(unaudited)
1. Financial Statements - The financial data presented herein are unaudited,
but in the opinion of management reflect those adjustments necessary for a
fair presentation of the results of operations and financial condition of
Ford Motor Company and its consolidated subsidiaries for the periods and at
the dates presented. Results for interim periods should not be considered
indicative of results for a full year. Reference should be made to the
financial statements contained in our Annual Report on Form 10-K for the
year ended December 31, 2003 (the "10-K Report"). For purposes of this
report, "Ford", the "Company", "we", "our", "us" or similar references
means Ford Motor Company and its consolidated subsidiaries unless the
context requires otherwise. Prior period amounts in our sector financial
statements, consolidated financial statements and notes have been
reclassified to reflect discontinued/held for sale operations.
2. Automotive Inventories are summarized as follows (in millions):
June 30, December 31,
2004 2003
----------------- -----------------
Raw materials, work in process and supplies $ 4,001 $ 3,842
Finished products 7,610 6,335
------- -------
Total inventories at FIFO 11,611 10,177
Less LIFO adjustment (997) (996)
------- -------
Total inventories $10,614 $ 9,181
======= =======
3. Goodwill and Other Intangibles - We perform annual testing in the second
quarter on goodwill and certain other intangible assets to determine if any
impairment has occurred. No impairment resulted from our annual test in the
second quarter of 2004.
Changes in the carrying amount of goodwill are as follows (in millions):
Financial Services
Automotive Sector Sector
------------------------------------------ -----------------------------
FAP & Ford
Americas Europe/PAG Other Credit Hertz
-------- ---------- ----- ------ -----
Beginning balance,
December 31, 2003 $154 $5,152 $ 72 $129 $640
Exchange translation/other 24 (98) (5) - (4)
---- ------ ---- ---- ----
Ending balance,
June 30, 2004 $178 $5,054 $ 67 $129 $636
==== ====== ==== ==== ====
In addition, included within Equity in net assets of affiliated companies
was goodwill of $269 million at June 30, 2004.
The components of identifiable intangible assets are as follows as of June
30, 2004 (in millions):
Automotive Sector Financial Services Sector
---------------------------------------- --------------------------------------------
Amortizable Non-amortizable Amortizable Non-amortizable
--------------- --------------------- ------------------ ----------------------
Gross carrying amount $ 557 $ 453 $ 92 $ 189
Less: accumulated
amortization (122) - (47) -
----- ----- ---- -----
Net intangible assets $ 435 $ 453 $ 45 $ 189
===== ===== ==== =====
Pre-tax amortization expense related to these intangible assets for the six
months ended June 30, 2004 was $19 million. Intangible asset amortization
is forecasted to range from $30 to $40 million per year for the next five
years.
4. Variable Interest Entities - In January 2003, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51, which expands upon and strengthens existing accounting guidance
concerning when a company should include in its financial statements the
assets, liabilities and activities of another entity. In December 2003, the
FASB issued FIN 46R, which revised FIN 46, in order to clarify the
provisions of the original interpretation. A Variable Interest Entity
("VIE") does not share economic risks and rewards through typical equity
ownership arrangements; instead, contractual or other relationships
re-distribute economic risks and rewards among equity holders and other
parties. Once an entity is determined to be a VIE, the party with the
controlling financial interest, the primary beneficiary, is required to
consolidate it. FIN 46 also requires disclosures about VIEs that the
Company is not required to consolidate but in which it has a significant
variable interest.
8
Item 1. Financial Statements (Continued)
Company and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
---------------------------------
(unaudited)
4. Variable Interest Entities (Continued)
--------------------------
Effective July 1, 2003, we adopted FIN 46 for VIEs formed prior to February
1, 2003. As a result of consolidating the VIEs of which we are the primary
beneficiary, in the third quarter of 2003 we recognized a non-cash charge
of $264 million as the Cumulative effect of change in accounting principle
in our statement of income. The charge represented the difference between
the fair value of the assets, liabilities and minority interests recorded
upon consolidation and the carrying value of the investments. Recorded
assets excluded goodwill in accordance with FIN 46.
The liabilities recognized as a result of consolidating the VIEs do not
represent additional claims on our general assets, rather, they represent
claims against the specific assets of the consolidated VIEs. Conversely,
assets recognized as a result of consolidating these VIEs do not represent
additional assets that could be used to satisfy claims against our general
assets. Reflected in our June 30, 2004 balance sheet are $3.8 billion of
VIE assets.
During the second quarter of 2004, there were no significant changes to
VIEs of which we are the primary beneficiary. For further discussions
regarding VIEs, please see Note 13 of the Notes to the Financial Statements
in the 10-K Report.
VIEs of which we are not the primary beneficiary:
------------------------------------------------
Automotive Sector
-----------------
Ford has several investments in other joint ventures deemed to be VIEs of
which we are not the primary beneficiary. The risks and rewards associated
with our interests in these entities are based primarily on ownership
percentages. Our maximum exposure (approximately $4 million at June 30,
2004) to any potential losses associated with these VIEs is limited to our
equity investments and, where applicable, receivables due from the VIEs.
For further discussions regarding VIEs of which we are not the primary
beneficiary, please see Note 13 of the Notes to the Financial Statements in
the 10-K Report.
Financial Services Sector
-------------------------
Ford Credit has investments in certain joint ventures deemed to be VIEs of
which it is not the primary beneficiary. The risks and rewards associated
with Ford Credit's interests in these entities are based primarily on
ownership percentages. Ford Credit's maximum exposure (approximately $133
million at June 30, 2004) to any potential losses associated with these
VIEs is limited to its equity investments, and, where applicable,
receivables due from the VIEs.
Ford Credit also sells receivables to bank-sponsored asset-backed
commercial paper issuers that are special purpose entities ("SPEs") of the
sponsor bank and are not consolidated by us. At June 30, 2004, these SPEs
held about $4.5 billion of retail installment sale contracts previously
owned by Ford Credit.
5. Derivative Financial Instruments - We adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended and interpreted,
on January 1, 2001. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and requires that all derivatives be
recorded at fair value on our balance sheet, including embedded
derivatives.
Income Statement Impact: The ineffective portion of designated hedges,
amortization of mark-to-market adjustments associated with hedging
relationships that have been terminated, and mark-to-market adjustments
that reflect changes in interest rates for non-designated hedging activity
are recognized in Cost of sales for the Automotive sector and in Revenues
for the Financial Services sector and are shown in the table below (in
millions):
Income/(Loss) Before Income Taxes
---------------------------------------------------------------
Second Quarter First Half
-------------------------------- -----------------------------
2004 2003 2004 2003
---------------- --------------- --------------- -------------
Automotive Sector $ (106) $ 109 $ 94 $ 95
Financial Services Sector 88 99 135 120
------ ------ ------ ------
Total $ (18) $ 208 $ 229 $ 215
====== ====== ====== ======
Fair Value of Derivative Instruments: The fair value of derivatives
reflects the price that a third party would be willing to pay or receive in
arm's length transactions for assuming our position in the derivatives
transaction and includes mark-to-market adjustments to reflect the effects
of changes in the related index. The following tables summarize the
estimated fair value of our derivative
9
Item 1. Financial Statements (Continued)
Company and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
---------------------------------
(unaudited)
5. Derivative Financial Instruments (Continued)
--------------------------------
financial instruments, taking into consideration the effects of legally
enforceable netting agreements, (in billions):
June 30, 2004 December 31, 2003
-------------------------------- -----------------------------
Fair Value Fair Value Fair Value Fair Value
Assets Liabilities Assets Liabilities
---------------- --------------- --------------- --------------
Automotive Sector
-----------------
Total derivative financial instruments $ 1.9 $ 0.5 $ 2.3 $ 0.6
===== ===== ===== =====
Financial Services Sector
-------------------------
Foreign currency swaps, forwards and options $ 3.5 $ 0.7 $ 6.3 $ 1.1
Interest rate swaps 2.6 0.2 3.9 0.2
Impact of netting agreements (0.3) (0.3) (0.3) (0.3)
----- ----- ----- -----
Total derivative financial instruments $ 5.8 $ 0.6 $ 9.9 $ 1.0
===== ===== ===== =====
6. Equity in Net Assets of Affiliated Companies - Our Equity in net assets of
affiliated companies is accounted for using the cost or equity methods. We
periodically review our equity investments for loss in value that is
considered other-than-temporary. Included in our Equity in net assets of
affiliated companies is an investment in Ballard Power Systems Inc.
("Ballard"). Ballard's common stock is traded on the NASDAQ and the Toronto
Stock Exchanges.
In June 2004, we determined a portion of our investment to be held-for-sale
and that portion was adjusted to fair market value as of June 30, 2004.
Fair market value was determined primarily based on the trading price of
Ballard's publicly traded shares at June 30, 2004. Additionally, a review
of the long-term portion of our investment indicated an
other-than-temporary loss in value existed, which resulted in a write-down
of our long-term investment. As a result of these two events, we recognized
a pre-tax loss of $120 million in the second quarter of 2004.
Subsequent to June 30, 2004, the price of Ballard publicly traded common
stock has continued to decline. We estimate the potential further decline
in the fair market value of our long-term investment to be about $30
million based on the closing price of Ballard's publicly traded common
stock as of July 30, 2004.
7. Amounts Per Share of Common and Class B Stock - The calculation of diluted
income/(loss) per share of Common and Class B Stock takes into account the
effect of rights to acquire our Common Stock, such as convertible
securities and stock options, considered to be potentially dilutive. Basic
and diluted income/(loss) per share were calculated using the following (in
millions):
Second Quarter First Half
------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Diluted Income
--------------
Income/(loss) from continuing operations
attributable to Common and Class B Stock $1,162 $ 426 $3,137 $1,327
Income impact of assumed conversion of
convertible preferred securities 48 54 95 107
------ ------ ------ ------
Diluted income/(loss)
from continuing operations $1,210 $ 480 $3,232 $1,434
====== ====== ====== ======
Average shares outstanding 1,831 1,832 1,832 1,832
Issuable/(returnable) and committed ESOP shares (4) (2) (4) (2)
------ ------ ------ ------
Basic shares 1,827 1,830 1,828 1,830
Employee compensation-related shares,
primarily stock options 17 12 18 8
Convertible preferred securities 282 282 282 282
------ ------ ------ ------
Diluted shares 2,126 2,124 2,128 2,120
====== ====== ====== ======
10
Item 1. Financial Statements (Continued)
Ford Motor Company and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
---------------------------------
(unaudited)
8. Comprehensive Income - Other comprehensive income/(loss) primarily
reflected adjustments for foreign currency translation, SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and minimum
pension liability. Total comprehensive income/(loss) is summarized as
follows (in millions):
Second Quarter First Half
------------------------- ------------------------
2004 2003 2004 2003
----------- ---------- ---------- ----------
Net income/(loss) $1,165 $ 417 $3,117 $1,313
Other comprehensive income/(loss) (296) 1,054 (795) 1,466
------ ------ ------ ------
Total comprehensive income/(loss) $ 869 $1,471 $2,322 $2,779
====== ====== ====== ======
9. Retirement Benefits - Pension, postretirement healthcare and life insurance
benefit expense is summarized as follows (in millions):
Second Quarter
-----------------------------------------------------------------------------
Pension Benefits
-------------------------------------------------- Health Care and
U.S. Plans Non-U.S. Plans Life Insurance
------------------------ ------------------------ ---------------------
2004 2003 2004 2003 2004 2003
----------- ---------- ----------- ----------- ---------- -----------
Service cost $ 159 $ 148 $ 138 $ 123 $ 136 $ 130
Interest cost 610 605 334 292 492 500
Expected return on assets (803) (790) (420) (345) (56) (9)
Amortization of:
Prior service cost 125 109 26 23 (55) (45)
(Gains)/losses and other 5 8 50 37 153 132
Separation programs 1 - 12 - - -
Allocated costs to Visteon (26) (22) - - (60) (79)
------- ------- ------- ------- ----- -----
Net expense/(income) $ 71 $ 58 $ 140 $ 130 $ 610 $ 629
======= ======= ======= ======= ===== =====
First Half
-----------------------------------------------------------------------------
Pension Benefits
--------------------------------------------------
Health Care and
U.S. Plans Non-U.S. Plans Life Insurance
------------------------ ------------------------ -----------------------
2004 2003 2004 2003 2004 2003
----------- ---------- ----------- ----------- ---------- -----------
Service cost $ 318 $ 296 $ 276 $ 246 $ 273 $ 260
Interest cost 1,220 1,210 668 584 988 1,000
Expected return on assets (1,606) (1,580) (820) (691) (112) (18)
Amortization of:
Prior service cost 250 218 52 56 (110) (90)
(Gains)/losses and other 11 16 93 73 306 264
Separation programs 1 - 33 - - -
Allocated costs to Visteon (52) (44) - - (123) (158)
------- ------- ------- ------- ------- -------
Net expense/(income) $ 142 $ 116 $ 302 $ 268 $ 1,222 $ 1,258
======= ======= ======= ======= ======= =======
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 was signed into law. The law introduces a
prescription drug benefit under Medicare (Medicare Part D) as well as a
federal subsidy to sponsors of retiree healthcare benefit plans that
provide a benefit at least actuarially equivalent to Medicare Part D. We
reflected the impact of the subsidy as an unrecognized gain, which reduced
our benefit obligation by $1.8 billion at December 31, 2003. The impact of
the subsidy reduced our postretirement healthcare expense by approximately
$125 million for the six months ended June 30, 2004.
Company Contributions: Our policy for funded defined benefit pension plans
is to contribute, at a minimum, amounts required by applicable laws,
regulations, and union agreements. We from time to time make contributions
beyond those legally required. During the first half of 2004, we made $1.6
billion of contributions to pension funds and benefit payments for unfunded
pension plans.
On July 21, 2004, we contributed $1.5 billion to our previously established
long-term Voluntary Employees Beneficiary Association trust ("VEBA") for
U.S. hourly retiree healthcare and life insurance benefits.
We continue to evaluate further contributions to our pension funds and to
the VEBA.
10. Guarantees - The fair values of guarantees and indemnifications issued
since December 31, 2002 are recorded in the financial statements and are de
minimis.
At June 30, 2004, the following guarantees were issued and outstanding:
Guarantees related to affiliates and third parties: We guarantee debt and
lease obligations of certain joint ventures as well as certain financial
obligations of outside third parties to support business and economic
growth. Expiration dates vary, and guarantees will terminate on payment
and/or cancellation of the obligation. A payment would be triggered by
failure of the guaranteed party to
11
Item 1. Financial Statements (Continued)
Ford Motor Company and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
---------------------------------
(unaudited)
10. Guarantees (Continued)
----------
fulfill its obligation covered by the guarantee. In some circumstances, we
are entitled to recover from the third party amounts paid by us under the
guarantee. However, our ability to enforce these rights is sometimes stayed
until the guaranteed party is paid in full. The maximum potential payments
under these guarantees total approximately $458 million, the majority of
which relates to the Automotive sector.
In 1992, we issued $500 million of 7.25% Notes due October 1, 2008
("Notes"). In 1999, the bondholders agreed to relieve us as the primary
obligor with respect to the principal of these Notes. As part of this
transaction, Ford placed certain financial assets into an escrow trust for
the benefit of the bondholders, and the trust became the primary obligor
with respect to the principal (Ford became secondarily liable for the
entire principal amount). Currently $137 million is recorded in the
financial statements as Senior debt related to this transaction, which is
being amortized over the life of the Notes.
We also have guarantees outstanding associated with a subsidiary trust,
Ford Motor Company Capital Trust II ("Trust II"). For further discussions
of Trust II, refer to Notes 12 and 14 of the Notes to the Financial
Statements in the 10-K Report.
Indemnifications: In the ordinary course of business, we execute contracts
involving indemnifications standard in the industry and indemnifications
specific to a transaction such as the sale of a business. These
indemnifications might include claims related to any of the following:
environmental, tax and shareholder matters; intellectual property rights;
power generation contracts; governmental regulations and employment-related
matters; dealer, supplier, and other commercial contractual relationships;
and financial matters, such as securitizations. Performance under these
indemnities would generally be triggered by a breach of the terms of a
contract or by a third party claim. We regularly evaluate the probability
of having to incur costs associated with these indemnifications and have
accrued for expected losses that are probable. We are party to numerous
indemnifications and many of these indemnities do not limit potential
payment; therefore, we are unable to estimate a maximum amount of potential
future payments that could result from claims made under these indemnities.
Product Performance:
Warranty: Estimated warranty costs and additional service actions are
accrued for at the time a vehicle is sold to a dealer. Included in the
warranty cost accruals are costs for basic warranty coverages on vehicles
sold. Product recalls and other customer service actions are not included
in the warranty reconciliation below but are also accrued for at the time
of sale. Estimates for warranty costs are made based primarily on
historical warranty claim experience. The following is a tabular
reconciliation of the product warranty accrual (in millions):
First Half
-----------------------------
2004 2003
------------ -------------
Beginning balance $ 5,443 $5,401
Payments made during the period (1,745) (1,694)
Changes in accrual related to warranties issued during the period 1,800 1,698
Changes in accrual related to pre-existing warranties 13 (136)
Foreign currency translation (3) 131
------- ------
Ending balance $ 5,508 $5,400
======= ======
11. Segment Information - The Company's operating activity consists of two
operating sectors, Automotive and Financial Services.
Segment selection is based upon the organizational structure that we use to
evaluate performance and make decisions on resource allocation, as well as
availability and materiality of separate financial results consistent with
that structure.
Beginning with the second quarter of 2004, we changed the reporting of our
Automotive sector to show three primary segments, Americas, Ford Europe and
PAG, and Ford Asia Pacific and Africa/Mazda. Automotive sector prior period
information reflects the three primary segments in the table below.
The Americas segment includes primarily the sale of Ford, Lincoln and
Mercury brand vehicles and related service parts in North America (U.S.,
Canada and Mexico) and Ford-brand vehicles and related service parts in
South America, together with the associated costs to design, develop,
manufacture and service these vehicles and parts.
The Ford Europe and PAG segment includes primarily the sale of Ford-brand
vehicles and related service parts in Europe and Turkey and the sale of
Premier Automotive Group brand vehicles (i.e., Volvo, Jaguar, Land Rover
and Aston Martin) and related service parts throughout the world (including
North America and South America), together with the associated costs to
design, develop, manufacture and service these vehicles and parts.
12
Item 1. Financial Statements (Continued)
Ford Motor Company and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
---------------------------------
(unaudited)
11. Segment Information (Continued)
-------------------
The Asia Pacific and Africa/Mazda segment includes primarily the sale of
Ford-brand vehicles and related service parts in the Asia Pacific region
and South Africa, together with the associated costs to design, develop,
manufacture and service these vehicles and parts and also includes our
share of the results of Mazda Motor Corporation, of which we own 33.4%, and
certain of our Mazda-related investments.
The Other Automotive component of the Automotive sector consists primarily
of net interest expense, which is not managed individually by the three
segments.
Transactions among Automotive segments are presented on an absolute cost
basis, eliminating the effect of legal entity transfer prices within the
Automotive sector for vehicles, components and product engineering.
The Financial Services sector includes two primary segments, Ford Credit
and Hertz. Ford Credit provides vehicle-related financing, leasing, and
insurance. Hertz rents cars, light trucks and industrial and construction
equipment.
13
Item 1. Financial Statements (Continued)
Ford Motor Company and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
---------------------------------
(unaudited)
11. Segment Information (Continued)
-------------------
(in millions)
Automotive Sector Financial Services Sector a/
--------------------------------------------- ----------------------------------
Ford Asia
Ford Pacific
Europe & Africa Ford Elims/ Elims/
Americas and PAG /Mazda Other Total Credit Hertz Other Total Other Total
-------- -------- --------- ----- ------- ------- ------ ------- -------- ------- --------
b/
SECOND QUARTER 2004
Revenues
External customer $21,166 $13,676 $ 1,877 $ - $ 36,719 $ 4,539 $1,446 $ 98 $ 6,083 $ - $ 42,802
Intersegment 1,323 774 19 - 2,116 122 6 (1) 127 (2,243) -
Income
Income/(loss)
before income taxes 357 (171) 55 (298) (57) 1,422 144 (7) 1,559 - 1,502
SECOND QUARTER 2003
Revenues
External customer $21,133 11,599 1,410 - 34,142 5,059 1,266 115 6,440 - 40,582
Intersegment 1,111 397 23 - 1,531 79 9 (6) 82 (1,613) -
Income
Income/(loss)
before income taxes 376 (359) 17 (31) 3 661 57 (3) 715 - 718
FIRST HALF 2004
Revenues
External customer $45,069 $26,978 $ 3,516 $ - $ 75,563 $ 9,023 $2,724 $ 183 $ 11,930 $ - $ 87,493
Intersegment 2,195 1,534 32 - 3,761 250 11 (2) 259 (4,020) -
Income
Income/(loss)
before income taxes 2,334 (175) 137 (547) 1,749 2,509 137 (4) 2,642 - 4,391
Other Disclosures
Total assets at June 30 122,493 167,120 15,028 2,453 184,601 - 307,094
FIRST HALF 2003
Revenues
External customer $43,678 $21,952 $ 2,671 $ - $ 68,301 $ 10,502 $2,410 $ 184 $ 13,096 $ - $ 81,397
Intersegment 2,127 687 23 - 2,837 158 16 (8) 166 (3,003) -
Income
Income/(loss)
before income taxes 1,581 (694) 33 (255) 665 1,388 (2) 7 1,393 - 2,058
Other Disclosures
Total assets at June 30 118,732 175,000 13,086 4,973 193,059 - 311,791
- - - - - -
a/ Financial Services sector's interest income is recorded as Revenues.
b/ Includes intersector transactions occurring in the ordinary course of
business.
14
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Ford Motor Company:
We have reviewed the accompanying consolidated balance sheet of Ford Motor
Company and its subsidiaries as of June 30, 2004, and the related consolidated
statement of income for each of the three and six-month periods ended June 30,
2004 and 2003, and the consolidated statement of cash flows for each of the
six-month periods ended June 30, 2004 and 2003. In addition, we have reviewed
the accompanying interim sector balance sheet and the related sector statements
of income and of cash flows, presented for purposes of additional analysis. The
interim consolidated and sector financial statements (collectively, the "interim
financial statements") are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 4 to the interim financial statements, on July 1, 2003, the
Company adopted Financial Accounting Standards Board Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
We previously audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated and sector balance
sheets as of December 31, 2003, and the related consolidated and sector
statements of income and of cash flows (not presented herein), and consolidated
statement of stockholders' equity for the year then ended (not presented
herein), and in our report dated March 10, 2004, we expressed an unqualified
opinion on those consolidated and sector financial statements. In our opinion,
the information set forth in the accompanying consolidated and sector balance
sheet information as of December 31, 2003, is fairly stated in all material
respects in relation to the consolidated and sector balance sheets from which it
has been derived.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Detroit, MI
August 5, 2004
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
SECOND QUARTER RESULTS OF OPERATIONS
Our worldwide net income was $1.2 billion in the second quarter of 2004, or
$0.57 per diluted share of Common and Class B Stock. In the second quarter of
2003, net income was $417 million, or $0.22 per share.
Results by business sector for the second quarter of 2004 and 2003 are
shown below (in millions):
Second Quarter
Net Income/(Loss)
--------------------------------------------
2004
Over/(Under)
2004 2003* 2003
----------- ------------ -------------------
Income/(loss) before income taxes
Automotive sector $ (57) $ 3 $(60)
Financial Services sector 1,559 715 844
------ ------ ----
Total Company 1,502 718 784
Provision for/(benefit from) income taxes 268 194 74
Minority interests in net income/(loss) of subsidiaries 72 98 (26)
------ ------ ----
Income/(loss) from continuing operations 1,162 426 736
Income/(loss) from discontinued/held-for-sale operations 3 (9) 12
------ ------ ----
Net income/(loss) $1,165 $ 417 $748
====== ====== ====
- ----------
* Certain amounts were reclassified to conform to current period presentation
consistent with the presentation in our 10-K Report. Reclassifications
include profits and losses related to discontinued/held-for-sale
operations.
Automotive Sector
- -----------------
Details of Automotive sector results for the second quarter of 2004 and
2003 are shown below (in millions):
Second Quarter
--------------------------------------------------------------------------------
Income/(Loss) Before Taxes
Income/(Loss) Before Taxes Excluding Special Items
--------------------------------------- ---------------------------------------
2004 2004
Over/ Over/
(Under) (Under)
2004 2003 2003 2004 2003 2003
----------- ------------- ------------- --------- ------------ ------------------
Americas
Ford North America $ 335 $ 445 $(110) $ 455 $ 445 $ 10
Ford South America 22 (69) 91 22 (69) 91
------ ----- ----- ----- ----- -----
Total Americas 357 376 (19) 477 376 101
Ford Europe and PAG
Ford Europe 191 (525) 716 211 (525) 736
PAG (362) 166 (528) (362) 166 (528)
------ ----- ----- ----- ----- -----
Total Ford Europe and PAG (171) (359) 188 (151) (359) 208
Ford Asia Pacific and Africa/Mazda
Ford Asia Pacific and Africa (5) (28) 23 (5) (28) 23
Mazda and Associated Operations 60 45 15 60 45 15
----- ------ ----- ------ ------ -----
Total Ford Asia Pacific
and Africa/Mazda 55 17 38 55 17 38
Other Automotive (298) (31) (267) (298) (31) (267)
----- ------ ------ ----- ------ -----
Total, excluding special items 83 3 80
Special items * (140) - (140)
----- ------ -----
Total Automotive $ (57) $ 3 $ (60) $ (57) $ 3 $ (60)
===== ====== ===== ===== ====== =====
- --------------
* Special items include $(120) million of charges for revaluation and
restructuring of our investment in Ballard Power Systems (see discussion
below) and $(20) million of charges related to the completion of the
previously announced Ford Europe restructuring plan.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Details of Automotive sector sales and vehicle unit sales for the second
quarter 2004 and 2003 are shown below:
Sales Vehicle Unit Sales *
(in billions) (in thousands)
-------------------------------------------- --------------------------------------------
2004 2004
Over/(Under) Over/(Under)
2004 2003 2003 2004 2003 2003
--------- ---------- ----------------------- --------------------------------------------
Americas
Ford North America $20.5 $20.7 $(0.2) (1)% 919 982 (63) (6)%
Ford South America 0.7 0.4 0.3 75 67 49 18 37
----- ----- ----- --- ----- ----- --- --
Total Americas 21.2 21.1 0.1 0 986 1,031 (45) (4)
Ford Europe and PAG
Ford Europe 6.7 5.2 1.5 29 453 407 46 11
PAG 6.9 6.4 0.5 8 201 197 4 2
----- ----- ----- --- ----- ----- --- --
Total Ford Europe and PAG 13.6 11.6 2.0 17 654 604 50 8
Ford Asia Pacific and Africa 1.9 1.4 0.5 36 108 83 25 30
----- ----- ----- --- ----- ----- --- ---
Total Automotive $36.7 $34.1 $ 2.6 8% 1,748 1,718 30 2%
===== ===== ===== === ===== ===== === ===
- -------------
* Included in vehicle unit sales of Ford Asia Pacific and Africa are
Ford-badged vehicles sold in China and Malaysia by our unconsolidated
subsidiaries totaling 22,000 and 9,000 units in 2004 and 2003,
respectively. The revenue from these units is not reflected in the dollar
sales reported above.
Details of Automotive sector market share for selected markets for the
second quarter 2004 and 2003 are shown below:
2004
Over/(Under)
2004 2003 2003 Market
----------- ------------- -------------------- ------------------
Americas
Ford North America 18.1% 19.3% (1.2)pts. U.S. b/
Ford South America 11.1 11.7 (0.6) Brazil b/
Ford Europe and PAG a/
Ford Europe 8.6 8.5 0.1 Europe b/
PAG 1.3/2.4 1.3/2.2 0/0.2 U.S./Europe
Ford Asia Pacific and Africa 13.7 13.6 0.1 Australia b/
- ----------
a/ 2004 European market share for Ford Europe and PAG are based, in part, on
estimated vehicle registrations.
b/ Excludes market share of our Premier Automotive Group brand vehicles
(i.e. Volvo, Jaguar, Land Rover and Aston Martin).
The following discussion, except where noted, is based on Income/(Loss)
Before Taxes Excluding Special Items. We believe this measure to be useful to
investors because it excludes elements that we do not consider to be indicative
of earnings from our on-going operating activities. As a result, it provides
investors with a more relevant measure of the results generated by our
operations.
Compared with the second quarter of 2003, the improvement of $80 million in
income before income taxes for the Automotive sector reflected improved unit
sales volume, primarily at Ford Europe, and product mix, primarily at Ford North
America (about $400 million); favorable net pricing, primarily at Ford North
America (about $200 million); unchanged cost performance (measured at constant
volume, mix and exchange); the effects of unfavorable changes in exchange rates
(about $200 million); and higher net interest (about $300 million), which is
discussed below under "Other Automotive."
The unchanged cost performance resulted from the following factors:
o quality related costs increased by about $300 million, primarily reflecting
the non-recurrence of favorable accrual adjustments for warranty and
additional service action costs in the year-ago period;
o manufacturing and engineering costs declined by about $200 million,
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
o overhead costs, which includes administrative and staff support, declined
by about $200 million;
o net product costs declined by about $100 million; the reductions on
carryover models and the effect of the discontinuation of a supplier cost
reduction sharing program more than offset higher costs on new models;
o depreciation and amortization costs increased by about $200 million; and
o pension and retiree health care expenses were unchanged.
Americas
- --------
Ford North America. The improvement in profits for Ford North America
primarily reflected improved product mix and positive net pricing, offset
partially by lower volume and unfavorable cost performance. Positive net
pricing included the favorable impact of higher than expected proceeds from
sales of vehicles returned to us by daily rental car companies pursuant to
repurchase options.
Vehicle unit sales were down by 63,000 units, which primarily reflected
lower market share in the U.S., offset partially by higher U.S. industry
volume (up 1.8%). U.S. market share was down 1.2 percentage points,
primarily due to a reduction in retail market share.
We have been in an alliance with Ballard Power Systems Inc. ("Ballard") and
DaimlerChrysler AG ("DCX") since 1998 to develop fuel cell technology for
the automotive industry. We presently own 22 million shares of Ballard,
representing 18.7% of its outstanding shares. On July 8, 2004, we signed a
non-binding memorandum of understanding ("MOU") with Ballard and DCX to
acquire from Ballard a 50% interest in Ballard AG, Ballard's vehicular fuel
systems subsidiary, in exchange for 8.3 million shares of Ballard stock.
DCX presently owns 49% of Ballard AG and plans to acquire the remaining 1%
from Ballard. This acquisition will allow us jointly with DCX to focus on
the research, development and manufacturing of the vehicular fuel cell
system and Ballard to focus on fuel cell research, development and
manufacturing. Contemporaneous with the execution of the MOU, Ballard
issued to Ford and DCX a conditional call notice in satisfaction of a
pre-existing capital call obligation. Pursuant to this contingent call
notice, we and DCX would be required to invest C$25 million and C$30
million, respectively, to acquire additional shares of Ballard at a price
of C$12.33863 per share at the closing of the transactions contemplated by
the MOU. Assuming the transactions contemplated by the MOU occur, our
ownership interest in Ballard would decrease from 18.7% to 13.9% and DCX's
ownership interest would increase from 16.6% to 18.8%. (See also Note 6 of
the Notes to the Financial Statements for a discussion of our investment in
Ballard.)
Ford South America. The improvement in profits and sales for Ford South
America primarily reflected positive net pricing and higher unit sales
volumes, partially offset by unfavorable cost performance. The higher unit
sales volumes reflected higher industry sales volume. The unfavorable cost
performance reflected higher material costs, primarily for steel.
Ford Europe and PAG
- -------------------
Ford Europe. The improvement for Ford Europe primarily reflected higher
vehicle unit sales volume and favorable cost performance, including the
effects of our previously announced restructuring actions. The increase in
vehicle unit sales volume primarily reflected the higher sales in Turkey
and Russia, the strength of the Ford Focus C-Max model, and a slower rate
of dealer stock reductions. The improvement in revenue reflected the
increase in vehicle unit sales and stronger European currencies.
PAG. The deterioration in results for PAG primarily reflected unfavorable
changes in exchange rates, unfavorable product mix, higher costs including
the effects of product changeover at Land Rover, and lower net pricing.
Sales at Jaguar, particularly in the U.S., were less than expected and the
cost improvements progressed slower than expected at Jaguar and Land Rover.
Ford Asia Pacific and Africa/Mazda
- ----------------------------------
Ford Asia Pacific and Africa. The improvement for Ford Asia Pacific and
Africa primarily reflected favorable changes in exchange rates and
increased vehicle unit sales, offset partially by higher costs. The
increase in revenue primarily reflected higher sales and improved product
mix in Australia, South Africa, and Taiwan, as well
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
as favorable exchange rates. The increase in vehicle unit sales reflected
higher industry volumes in China, Australia, and Taiwan, and improved
market share in South Africa.
Mazda and Associated Operations. The change primarily reflected
improvements in our Mazda-related investments.
Other Automotive
- ----------------
The increase in loss before income taxes for Other Automotive primarily
reflected the reclassification of interest expense on our 6.50% Junior
Subordinated Debentures due 2032 held by a subsidiary trust, Ford Motor Company
Capital Trust II (prior to July 1, 2003, this interest expense was included in
Minority interests in net income/(loss) of subsidiaries) and lower earnings on
our gross cash.
Financial Services Sector
- -------------------------
Our Financial Services sector includes two primary segments, Ford Credit
and Hertz. Details of Financial Services sector income/(loss) before income
taxes for the second quarter of 2004 and 2003 are shown below (in millions):
Second Quarter
Income/(Loss) Before Income Taxes
--------------------------------------------
2004
Over/(Under)
2004 2003 2003
------------ ----------- -----------------
Ford Credit $1,422 $661 $761
Hertz* 144 57 87
Other Financial Services (7) (3) (4)
----- ---- ----
Total Financial Services sector $1,559 $715 $844
====== ==== ====
- -----------
* Includes amortization expense related to intangibles recognized upon
consolidation of Hertz.
Ford Credit
- -----------
The improvement in earnings resulted primarily from improvement in credit
loss performance (about $450 million), improved lease residual performance
(about $200 million) and improved financing margin (about $150 million), offset
partially by the impact of lower off-balance sheet securitizations and
whole-loan sale transactions (about $100 million). The improvement in lease
residual performance resulted from higher used vehicle prices and a reduction in
the percentage of vehicles returned by dealers to Ford Credit at the end of the
lease period.
Details of actual credit losses net of recoveries ("credit losses") and
loss-to-receivables ratios (annualized credit losses during a period as a
percentage of average net receivables for that period) for the second quarter of
2004 and 2003 are shown below:
Second Quarter
-------------------------
2004 2003
------------ -----------
Credit losses (in millions)
On-balance sheet $332 $452
Managed 446 623
Loss-to-receivables ratio
On-balance sheet 1.03% 1.44%
On-balance sheet (including credit losses
associated with reacquired receivables)* 1.07% 1.50%
- ----------
* Ford Credit believes that the use of the on-balance sheet
loss-to-receivables ratio that includes the credit losses on reacquired
receivables is useful to investors because it provides a more complete
presentation of Ford Credit's on-balance sheet credit loss performance.
The decrease of $120 million in credit losses for the on-balance sheet
portfolio primarily reflected improved loss performance in the U.S. retail
installment and operating lease portfolio resulting from lower repossessions and
a lower average loss per repossession. The on-balance sheet loss-to-receivables
ratio including reacquired receivables in the second quarter of 2004 was 1.07%,
down from 1.50% in 2003.
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Ford Credit's finance receivables, net of allowance for credit losses, and
net investment in operating leases for on-balance sheet, securitized off-balance
sheet, managed and serviced portfolios are shown below (in billions):
June 30, December 31,
2004 2003
---------------- -----------------
On-balance sheet (including on-balance sheet securitizations) $129.2 $132.1
Securitized off-balance sheet 45.8 49.4
------ ------
Managed $175.0 $181.5
====== ======
Serviced $180.5 $188.8
The decrease in on-balance sheet finance receivables and net investment in
operating leases of $2.9 billion primarily reflected the impact of lower retail
and lease placement volumes. The decrease in securitized off-balance sheet
receivables of $3.6 billion primarily reflected the slower pace of off-balance
sheet securitizations.
Shown below is Ford Credit's allowance for credit losses related to finance
receivables and operating leases for the periods specified:
June 30, December 31,
2004 2003
---------------- ----------------
Allowance for credit losses (in billions) $2.7 $3.0
Allowance as a percentage of end-of-period net receivables 2.05% 2.28%
The decrease in the allowance for credit losses of about $300 million
primarily reflected improving portfolio performance, especially in the United
States, and the impact of lower receivables.
The following table summarizes the activity related to the off-balance
sheet sales of receivables reported as revenues for the periods indicated (in
millions):
Second Quarter
--------------------------------
2004 2003
-------------- --------------
Net gain on sales of receivables $ 69 $ 51
Interest income from retained securities 166 197
Servicing fees 111 179
Excess spread and other 235 245
--------- ---------
Investment and other income related to sales of receivables 581 672
Less: Whole-loan income (32) (48)
--------- ---------
Income related to off-balance sheet securitizations $ 549 $ 624
========= =========
Memo:
Finance receivables sold $ 2,400 $ 2,666
Servicing portfolio as of period-end 51,304 62,595
Pre-tax gain per dollar of retail receivables sold 2.9% 1.9%
Investment and other income related to sales of receivables decreased $91
million or 14% from $672 million in the second quarter 2003 to $581 million in
the second quarter of 2004. This decline resulted from lower levels of
outstanding sold receivables, down about $11 billion compared with the second
quarter of 2003, reflecting primarily lower funding requirements. Excluding the
effects of whole-loan sale transactions, which totaled $10.4 billion in the
2002-2004 period, off-balance sheet securitization income declined $75 million
from $624 million in the second quarter of 2003 to $549 million in the second
quarter of 2004.
The net impact of off-balance sheet securitizations on earnings in a given
period will vary depending on the amount and type of receivables sold and the
timing of the transactions in the current period and the preceding two-to-three
year period, as well as the interest rate environment at the time the finance
receivables were originated and securitized.
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
The following table shows, on an analytical basis, the earnings impact of
off-balance sheet securitizations had Ford Credit reported them as on-balance
sheet and funded them through asset-backed financings for the periods indicated
(in millions):
Second Quarter
------------------------
2004 2003
----------- -----------
Financing revenue
Retail revenue $663 $ 951
Wholesale revenue 284 297
---- -----
Total financing revenue 947 1,248
Borrowing cost (244) (390)
---- -----
Net financing margin 703 858
Credit losses (101) (153)
---- -----
Income before income taxes $602 $ 705
==== =====
Memo:
Income related to off-balance sheet securitizations $549 $624
Recalendarization impact of off-balance sheet securitizations (53) (81)
In the second quarter of 2004, the impact to earnings of off-balance sheet
securitizations was $53 million lower than had these transactions been
structured as on-balance sheet securitizations. This difference results from
recalendarization effects caused by gain-on-sale accounting requirements. This
effect will fluctuate as the amount of receivables sold in off-balance sheet
securitizations increases or decreases over time.
Hertz
- -----
In the second quarter of 2004, income before income taxes was $144 million,
compared with $57 million in the second quarter of 2003. The improvement was
primarily due to higher rental volume in the Hertz worldwide car rental
business, offset partially by lower pricing. Earnings were also favorably
impacted by lower fleet costs, higher net proceeds received in excess of book
value on the disposal of used vehicles and equipment, and improved cost
performance.
FIRST HALF RESULTS OF OPERATIONS
Our worldwide net income was $3.1 billion in the first half of 2004, or
$1.51 per diluted share of Common and Class B Stock. In the first half of 2003,
net income was $1.3 billion, or $0.67 per share.
Results by business sector for the first half of 2004 and 2003 are shown
below (in millions):
First Half
Net Income/(Loss)
--------------------------------------------
2004
Over/(Under)
2004 2003* 2003
----------- ------------ -------------------
Income/(loss) before income taxes
Automotive sector $1,749 $ 665 $1,084
Financial Services sector 2,642 1,393 1,249
------ ------ ------
Total Company 4,391 2,058 2,333
Provision for/(benefit from) income taxes 1,097 531 566
Minority interests in net income/(loss) of subsidiaries 157 200 (43)
------ ------ ------
Income/(loss) from continuing operations 3,137 1,327 1,810
Income/(loss) from discontinued/held-for-sale operations (20) (14) (6)
------ ------ ------
Net income/(loss) $3,117 $1,313 $1,804
====== ====== ======
- ----------
* Certain amounts were reclassified to conform to current period presentation
consistent with the presentation in our 10-K Report. Reclassifications
include profits and losses related to discontinued/held-for-sale
operations.
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Automotive Sector
- -----------------
Details of Automotive sector results for the first half of 2004 and 2003
are shown below (in millions):
First Half
--------------------------------------------------------------------------------
Income/(Loss) Before Taxes
Income/(Loss) Before Taxes Excluding Special Items
-------------------------------------- ---------------------------------------
2004 2004
Over/ Over/
(Under) (Under)
2004 2003 2003 2004 2003 2003
---------- ------------ -------------- ---------- ------------ ---------------
Americas
Ford North America $2,297 $1,681 $ 616 $2,417 $1,681 $ 736
Ford South America 37 (100) 137 37 (100) 137
------ ------ ------ ------ ------ ------
Total Americas 2,334 1,581 753 2,454 1,581 873
Ford Europe and PAG
Ford Europe 167 (772) 939 216 (772) 988
PAG (342) 78 (420) (342) 78 (420)
------ ------ ------ ------ ------ ------
Total Ford Europe and PAG (175) (694) 519 (126) (694) 568
Ford Asia Pacific/Africa and Mazda
Ford Asia Pacific and Africa 23 (53) 76 23 (53) 76
Mazda and Associated Operations 114 86 28 114 86 28
------ ------ ------ ------ ------ ------
Total Ford Asia Pacific/Africa
and Mazda 137 33 104 137 33 104
Other Automotive (547) (255) (292) (564) (255) (309)
------ ------ ------ ------ ------ ------
Total, excluding special items 1,901 665 1,236
Special items * (152) - (152)
------ ------ ------
Total Automotive $1,749 $ 665 $1,084 $1,749 $ 665 $1,084
====== ====== ====== ====== ====== ======
- ----------
* Special items include $(120) million of charges for revaluation and
restructuring of our investment in Ballard Power Systems (see discussion
above), $(49) million related to the completion of the previously announced
Ford Europe restructuring plan, and $17 million related to a prior
divestiture.
Details of Automotive sector sales and vehicle unit sales for the first
half 2004 and 2003 are shown below:
Sales Vehicle Unit Sales *
(in billions) (in thousands)
-------------------------------------------- --------------------------------------------
2004 2004
Over/(Under) Over/(Under)
2004 2003 2003 2004 2003 2003
--------- ----------- ---------------------- -------- ----------- -----------------------
Americas
Ford North America $43.8 $42.9 $0.9 2% 1,930 2,006 (76) (4)%
Ford South America 1.3 0.7 0.6 86 133 93 40 43
----- ----- ---- -- ----- ----- --- --
Total Americas 45.1 43.6 1.5 3 2,063 2,099 (36) (2)
Ford Europe and PAG
Ford Europe 13.2 10.2 3.0 29 876 791 85 11
PAG 13.7 11.8 1.9 16 390 369 21 6
----- ----- ---- -- ----- ----- --- --
Total Ford Europe and PAG 26.9 22.0 4.9 22 1,266 1,160 106 9
Ford Asia Pacific and Africa 3.5 2.7 0.8 30 204 165 39 24
----- ----- ---- -- ----- ----- --- --
Total Automotive $75.5 $68.3 $7.2 11% 3,533 3,424 109 3%
===== ===== ==== == ===== ===== === ==
- ----------
* Included in vehicle unit sales of Ford Asia Pacific and Africa are
Ford-badged vehicles sold in China and Malaysia by our unconsolidated
subsidiaries totaling 34,000 and 13,000 in 2004 and 2003, respectively. The
revenue from these units is not reflected in the dollar sales reported
above.
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Details of Automotive sector market share for selected markets for the
first half of 2004 and 2003 are shown below:
2004
Over/(Under)
2004 2003 2003 Market
------------ -------------- ------------------- ---------------------
Americas
Ford North America 18.4% 19.6% (1.2)pts. U.S. b/
Ford South America 11.2 11.1 0.1 Brazil b/
Ford Europe and PAG a/
Ford Europe 8.9 8.9 0 Europe b/
PAG 1.3/2.4 1.3/2.2 0/0.2 U.S./Europe
Ford Asia Pacific 13.6 13.9 (0.3) Australia b/
- ----------
a/ 2004 European market share for Ford Europe and PAG are based, in part, on
estimated vehicle registrations.
b/ Excludes market share of our Premier Automotive Group brand vehicles
(i.e. Volvo, Jaguar, Land Rover and Aston Martin).
The following discussion is based on Income/(Loss) Before Taxes Excluding
Special Items. We believe this measure to be useful to investors because it
excludes elements that we do not consider to be indicative of earnings from our
on-going operating activities. As a result, it provides investors with a more
relevant measure of the results generated by our operations.
Americas
- --------
Ford North America. The improvement in profits for Ford North America
primarily reflected improved product mix, positive net pricing, and
favorable cost performance, offset partially by lower volume.
Ford South America. The improvement in profits for Ford South America
primarily reflected positive net pricing and higher vehicle unit sales
volume and improved product mix, offset partially by unfavorable cost
performance. The higher unit sales volume reflected stronger industry sales
volumes and higher market share, particularly for the Ford EcoSport,
Fiesta, and Cargo models.
Ford Europe and PAG
- -------------------
Ford Europe. The improvement in profits for Ford Europe primarily reflected
favorable cost performance, including the effects of our previously
announced restructuring actions, higher vehicle unit sales volume and
positive net pricing. The increase in vehicle unit sales volume primarily
reflected the strength of the Ford Focus C-Max model and higher sales in
Turkey and Russia. The improvement in revenue primarily reflected stronger
European currencies and the increase in vehicle unit sales.
PAG. The deterioration in results for PAG primarily reflected unfavorable
changes in exchange rates, unfavorable product mix, and negative net
pricing, offset partially by higher unit sales volume. The higher unit
sales volume reflected higher market share in Europe and higher industry
volumes in Europe and the U.S.
Ford Asia Pacific and Africa/Mazda
- ----------------------------------
Ford Asia Pacific and Africa. The improvement for Ford Asia Pacific and
Africa primarily reflected favorable changes in exchange rates and higher
unit sales volume.
Mazda and Associated Operations. The change primarily reflected
improvements in our Mazda-related investments.
Other Automotive
- ----------------
The increase in loss before income taxes for Other Automotive primarily
reflected the reclassification of interest expense on our 6.50% Junior
Subordinated Debentures due 2032 held by a subsidiary trust, Ford Motor Company
Capital Trust II (prior to July 1, 2003, this interest expense was included in
Minority interests in net income/(loss) of subsidiaries) and lower earnings on
our gross cash.
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Financial Services Sector
- -------------------------
Details of Financial Services sector income/(loss) before income taxes for
the first half of 2004 and 2003 are shown below (in millions):
First Half
Income/(Loss) Before Income Taxes
--------------------------------------------
2004
Over/(Under)
2004 2003 2003
------------ ----------- -----------------
Ford Credit $2,509 $1,388 $1,121
Hertz* 137 (2) 139
Other Financial Services (4) 7 (11)
------ ------ ------
Total Financial Services sector $2,642 $1,393 $1,249
====== ====== ======
- ----------
* Includes amortization expense related to intangibles recognized upon
consolidation of Hertz.
Ford Credit
- -----------
The improvement in earnings resulted primarily from improvement in credit
loss performance, improved lease residual performance and improved financing
margin, offset partially by the impact of lower off-balance sheet
securitizations and whole-loan sale transactions. The improvement in lease
residual performance resulted from higher used vehicle prices and a reduction in
the percentage of vehicles returned by dealers to Ford Credit at the end of the
lease period.
Details of credit losses and loss-to-receivables ratios for the first half
of 2004 and 2003 are shown below:
First Half
-------------------------
2004 2003
------------ ------------
Credit losses (in millions)
On-balance sheet $667 $ 945
Managed 939 1,309
Loss-to-receivables ratio
On-balance sheet 1.03% 1.53%
On-balance sheet (including credit losses
associated with reacquired receivables)* 1.09% 1.56%
- ----------
* Ford Credit believes that the use of the on-balance sheet
loss-to-receivables ratio that includes the credit losses on reacquired
receivables is useful to investors because it provides a more complete
presentation of Ford Credit's on-balance sheet credit loss performance.
The decrease of $278 million in credit losses for the on-balance sheet
portfolio primarily reflected improved loss performance in the U.S. retail
installment and operating lease portfolio resulting from lower repossessions and
a lower average loss per repossession. The on-balance sheet loss-to-receivables
ratio including reacquired receivables in the first half of 2004 was 1.09%, down
from 1.56% in 2003.
Hertz
- -----
In the first half of 2004, income before income taxes was $137 million,
compared with a loss of $2 million in the first half of 2003. The improvement
was primarily due to higher rental volume in the Hertz worldwide car rental
business, offset partially by lower pricing. Earnings were also favorably
impacted by lower fleet costs, higher net proceeds received in excess of book
value on the disposal of used vehicles and equipment, and improved cost
performance.
LIQUIDITY AND CAPITAL RESOURCES
Automotive Sector
- -----------------
For the Automotive sector, liquidity and capital resources include cash
generated by operations, gross cash balances, funds raised in capital markets
and committed credit lines.
24
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Gross Cash. Automotive gross cash includes cash and cash equivalents,
marketable and loaned securities and assets contained in a short-term Voluntary
Employee Beneficiary Association trust ("VEBA") as detailed below (in billions):
2004 2003
------------------------------ -----------------------------
June 30 January 1 June 30 January 1
--------------- ------------- -------------- ------------
Cash and cash equivalents $ 5.9 $ 5.4 $ 7.5 $ 5.2
Marketable securities 11.6 10.8 15.0 17.4
Loaned securities 5.3 5.7 4.6 -
----- ----- ----- ------
Total cash, marketable and
loaned securities 22.8 21.9 27.1 22.6
Short-term VEBA assets 4.0 4.0 1.6 2.7
----- ----- ----- ------
Gross cash $26.8 $25.9 $28.7 $ 25.3
===== ===== ===== ======
In managing our business, we classify changes in gross cash into four
categories: operating-related (both including and excluding pension/long-term
VEBA contributions and tax refunds), capital transactions with the Financial
Services sector, acquisitions and divestitures and other (primarily financing
related). Our key metric for operating-related cash flow is cash flow before
funded pension plan and long-term VEBA contributions and tax refunds. This
metric best represents the ability of our Automotive operations to generate
cash. We believe the cash flow analysis reflected in the table below, which
differs from a cash flow statement presented in accordance with GAAP, is useful
to investors because it includes cash flow elements that we consider to be
related to our operating activities (e.g., capital spending) that are not
included in Cash flows from operating activities before securities trading, the
most directly comparable GAAP financial measure.
Changes in Automotive gross cash for the second quarter and first half of
2004 and 2003 are summarized below (in billions):
Second Quarter First Half
----------------------- -----------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Gross cash at end of period $26.8 $28.7 $26.8 $28.7
Gross cash at beginning of period 26.5 26.6 25.9 25.3
----- ----- ----- -----
Total change in gross cash $ 0.3 $ 2.1 $ 0.9 $ 3.4
===== ===== ===== =====
Operating-related cash flows
Automotive income/(loss) before income
taxes, excluding special items $ 0.1 $ - $ 1.9 $ 0.7
Capital expenditures (1.4) (2.0) (2.6) (3.4)
Depreciation and special tools amortization 1.6 1.3 3.2 2.7
Changes in receivables, inventory and trade payables (1.4) (0.2) (1.0) (0.6)
Other 1.2 1.7 0.9 2.4
----- ----- ----- -----
Total operating-related cash flows before pension/
long-term VEBA contributions and tax refunds 0.1 0.8 2.4 1.8
Funded pension plans/long-term VEBA contributions (0.3) (0.1) (1.5) (1.3)
Tax refunds - - - 0.9
----- ----- ----- -----
Total operating-related cash flows (0.2) 0.7 0.9 1.4
Capital transactions with Financial Services sector * 1.0 0.9 1.9 1.7
Divestitures and acquisitions 0.1 0.2 0.3 0.4
Other
Dividends paid to shareholders (0.2) (0.2) (0.4) (0.4)
Changes in total Automotive sector debt (0.3) 0.4 (1.7) 0.2
Other (0.1) 0.1 (0.1) 0.1
----- ----- ----- -----
Total change in gross cash $ 0.3 $ 2.1 $ 0.9 $ 3.4
===== ===== ===== =====
- ----------
* Primarily dividends, capital contributions, loans and loan repayments.
25
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Shown in the table below is a reconciliation between Cash flows from
operating activities before securities trading and operating-related cash flows,
calculated as shown in the table above, for the second quarter and first half of
2004 and 2003 (in billions):
Second Quarter First Half
------------------------- ------------------------
2004 2003 2004 2003
----------- ----------- ---------- ----------
Cash flows from operating activities
before securities trading $ 1.0 $ 2.8 $ 3.6 a/ $ 5.7 a/
Items included in operating-related cash flow
Capital expenditures (1.4) (2.0) (2.6) (3.4)
Net transactions between Automotive
And Financial Services sectors 0.6 - 0.5 b/ (0.3) b/
Other (0.4) (0.1) (0.6) (0.6)
----- ----- ----- -----
Operating-related cash flows $(0.2) $ 0.7 $ 0.9 $ 1.4
===== ===== ===== =====
- ----------
a/ As shown in our condensed sector statement of cash flows for the
Automotive sector.
b/ Primarily payables and receivables between the sectors in the normal
course of business, as shown in our condensed sector statement of cash
flows.
Automotive operating-related cash flow, excluding pension and long-term
VEBA contributions and tax refunds, was positive at about $100 million for the
second quarter 2004. This reflects Automotive pre-tax profit excluding special
items ($83 million), depreciation and amortization in excess of capital spending
(about $200 million), and other operating-related changes, primarily timing
differences between expense or revenue recognition and the corresponding cash
payments for items such as health care, pension, marketing and warranty
(positive cash flow of $1.2 billion), offset by changes in receivables,
inventory, and trade payables (negative cash flow of $1.4 billion).
Capital transactions with the Financial Services sector, primarily
dividends received from Ford Credit, totaled $1 billion in the second quarter of
2004.
Balance Sheet Improvement Actions. We are taking actions over time to
strengthen the Automotive balance sheet. By year-end 2004, we plan to have taken
actions that, in total, will have reduced our obligations by about $10 billion
over the past two years. These capital improvements include pre-funding our
healthcare and pension obligations and reducing Automotive debt.
In 2003, these actions included $2.8 billion in contributions to our U.S.
and non-U.S. funded pension plans and a $2 billion contribution to a long-term
VEBA, which we are using to pre-fund a portion of our healthcare obligation.
In the second quarter 2004, we contributed about $300 million to our
non-U.S. funded pension plans, for a total of $1.5 billion in contributions to
non-U.S. funded pension plans for the first half 2004.
In the first half 2004, we repurchased $1 billion of senior debt in the
open market. The majority of our purchases have been among four large issues,
which have maturities between 2028 and 2032. In addition, in January 2004, we
redeemed our 9% Trust Originated Preferred Securities, which had the effect of
reducing our subordinated debt by about $700 million.
In the second half of 2004, we plan $2 billion of additional balance sheet
improvement actions, including a $1.5 billion contribution on July 21, 2004 to
our long-term VEBA.
Shutdown Working Capital Financing. Each year during the summer and at year
end, vacation and holiday production shutdowns occur. During these periods,
wholesale revenues are not generated (because we are not shipping and selling
vehicles to dealers). Historically, we funded the seasonal cash outflows during
the shut-down period by reducing cash reserves.
In July 2004, we initiated an alternative source of cost-effective funding
for the 2004 United States summer vacation shutdown through an uncommitted
auction facility with our bank group. We received $3.6 billion in bids in our
first auction and elected to raise $2.3 billion, which matures on September 7,
2004. We expect to use this funding process for future shutdowns.
With this shutdown working capital financing, a portion of our cash
reserves otherwise held for shutdown periods can be deployed more efficiently to
address other longer-term liabilities (including pension and healthcare
obligations and debt retirement), as described above.
26
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Debt. At June 30, 2004, our Automotive sector had total senior debt of
$13.7 billion, compared with $15.0 billion at December 31, 2003. The debt
decrease primarily reflected the repurchases described above.
Ford Motor Company Capital Trust II (the "Trust II") had outstanding $5.0
billion of trust preferred securities at June 30, 2004. The dividend and
liquidation preferences on these securities are paid from interest and principal
payments on our junior subordinated debentures held by the Trust II in a
principal amount of $5.2 billion.
Credit Facilities. Excluding credit facilities of our Variable Interest
Entities, at July 1, 2004, the Automotive sector had $7.0 billion of
contractually committed credit agreements with various banks, of which $6.9
billion were available for use. Seventy-six percent of the total facilities are
committed through June 30, 2009. Of the $7.0 billion, $6.7 billion constitute
global credit facilities and may be used, at Ford's option, by any of its direct
or indirect majority-owned subsidiaries on a guaranteed basis. Ford also has the
ability to transfer, on a non-guaranteed basis, $2.5 billion of such global
credit facilities to Ford Credit and $518 million to FCE Bank plc. ("FCE"), Ford
Credit's European operation. All of the global credit facilities are free of
material adverse change clauses and restrictive financial covenants (for
example, debt-to-equity limitations, minimum net worth requirements and credit
rating triggers) that could limit our ability to borrow.
Financial Services Sector
- -------------------------
Ford Credit
- -----------
Debt and Cash. Ford Credit's total debt was $138.3 billion at June 30,
2004, down $11.4 billion compared with December 31, 2003. This decrease
primarily reflected repayment of debt maturing in the second quarter of 2004 and
lower asset levels, which reduced Ford Credit's funding needs. Ford Credit's
unsecured commercial paper outstanding at June 30, 2004 totaled $8.0 billion, up
$1.9 billion compared with December 31, 2003.
Funding. During the second quarter of 2004, Ford Credit issued $2.2 billion
of long-term debt with maturities of one to 10 years, including about $600
million of unsecured institutional funding and about $1.6 billion of unsecured
retail bonds. In addition, Ford Credit realized proceeds of about $2.1 billion
from sales of receivables in off-balance sheet securitizations.
Ford Credit expects its full-year 2004 public term funding requirements to
be between $13 billion and $19 billion. In the first half of 2004, it completed
about $8 billion of public term funding transactions. Because of significant
available liquidity and a relatively smaller balance sheet size, Ford Credit
plans, depending on market conditions, to repurchase a portion of its
outstanding debt securities during the remainder of 2004.
Leverage. Ford Credit uses leverage, or the debt-to-equity ratio, to make
various business decisions, including establishing pricing for retail, wholesale
and lease financing, and assessing its capital structure. Ford Credit calculates
leverage on a financial statement basis and on a managed basis.
Ford Credit's financial statement leverage (debt-to-equity ratio) is
calculated in the following table:
June 30, December 31,
2004 2003
---------------- ----------------
Total debt (in billions) $138.3 $149.7
Total stockholder's equity (in billions) 12.1 12.5
Debt-to-equity ratio (to 1) 11.4 12.0
At June 30, 2004, Ford Credit's financial statement leverage was 11.4 to 1,
compared with 12.0 to 1 at December 31, 2003. This decrease in leverage resulted
primarily from lower funding requirements.
27
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Ford Credit's managed leverage is calculated in the following table (in
billions, except ratios):
June 30, December 31,
2004 2003
---------------- ----------------
Total debt $138.3 $149.7
Securitized off-balance sheet
receivables outstanding 45.8 49.4
Retained interest in securitized
off-balance sheet receivables (16.4) (13.0)
Adjustments for cash and
cash equivalents (8.8) (15.7)
Adjustments for SFAS No. 133 (3.2) (4.7)
------ ------
Adjusted debt $155.7 $165.7
====== ======
Total stockholder's equity
(including minority interest) $ 12.1 $ 12.5
Adjustment for SFAS No. 133 0.1 0.2
------ ------
Adjusted equity $ 12.2 $ 12.7
====== ======
Managed debt-to-equity ratio (to 1) 12.7 13.0
At June 30, 2004, Ford Credit's managed leverage was 12.7 to 1, down from
13.0 to 1 at year-end 2003. Ford Credit's dividend policy is based in part on
its strategy to maintain managed leverage at the lower end of the 13 - 14 to 1
range. Based on Ford Credit's profitability and managed receivable levels, it
paid dividends of $1.9 billion in the first half of 2004.
Credit Facilities. For additional funding and to maintain liquidity, Ford
Credit and its majority-owned subsidiaries (including FCE) have contractually
committed credit facilities with financial institutions that totaled
approximately $7.7 billion at July 1, 2004. This includes $4.8 billion of Ford
Credit facilities ($3.9 billion global and $0.9 billion non-global) and $2.9
billion of FCE facilities ($2.7 billion global and $0.2 billion non-global).
Approximately $1.1 billion of the total facilities were in use at July 1, 2004.
Of the $7.7 billion, about 42% of these facilities are committed through June
30, 2009. The global credit facilities may be used, at Ford Credit's or FCE's
option, by any of their direct or indirect majority-owned subsidiaries. Ford
Credit or FCE, as the case may be, will guarantee any such borrowings. All of
the global credit facilities are free of material adverse change clauses and
restrictive financial covenants (for example, debt-to-equity limitations,
minimum net worth requirements and credit rating triggers) that would limit our
ability to borrow.
Additionally, at July 1, 2004, banks provided $18.6 billion of
contractually committed liquidity facilities supporting two asset-backed
commercial paper programs; $18.2 billion support Ford Credit's FCAR program and
$425 million support Ford Credit's Motown NotesSM Program. Facilities supporting
Ford Credit's FCAR program increased to $18.5 billion at July 12, 2004,
reflecting additional bank commitments of $250 million.
In addition, Ford Credit also has entered into agreements with several
bank-sponsored commercial paper issuers ("conduits") under which such conduits
are contractually committed to purchase from Ford Credit, at Ford Credit's
option, up to an aggregate of approximately $11.8 billion of receivables. The
agreements have varying maturity dates between September 16, 2004 and June 23,
2005. As of June 30, 2004, approximately $3.7 billion of these conduit
commitments have been utilized.
Hertz
- -----
Debt and Cash. At June 30, 2004, Hertz had total debt of $9.2 billion, up
$1.6 billion from December 31, 2003. Commercial paper outstanding at June 30,
2004 totaled $2.4 billion, compared with $2.2 billion at December 31, 2003. At
June 30, 2004, Hertz had cash and cash equivalents of $860 million, up from $610
million at December 31, 2003.
Hertz has an asset backed securitization ("ABS") program for its domestic
car rental fleet to reduce its borrowing costs and enhance its financing
resources. On March 31, 2004, Hertz issued $600 million of medium term notes
under its ABS program. As of June 30, 2004, $1.1 billion was outstanding under
the ABS program consisting of $500 million of commercial paper and the $600
million of medium term notes.
Total Company
- -------------
Stockholders' Equity. Our stockholders' equity was $13.6 billion at June
30, 2004, up $1.9 billion from December 31, 2003. The increase primarily
reflected net income of $3.1 billion less dividends of $366 million and other
comprehensive loss of $795 million. See Note 8 of the Notes to the Financial
Statements for further discussion of other comprehensive income/(loss).
28
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
OFF-BALANCE SHEET ARRANGEMENTS
Special Purpose Entities. At June 30, 2004, the total outstanding principal
amount of receivables sold by Ford Credit held by off-balance sheet
securitization entities was $45.8 billion, down $3.6 billion from December 31,
2003. Ford Credit's retained interests in such sold receivables at June 30, 2004
were $16.4 billion, up $3.4 billion from December 31, 2003. The decrease in
receivables held by off-balance sheet securitization entities primarily
reflected Ford Credit's lower funding requirements. The increase in retained
interests primarily reflected the maturity of a wholesale term securitization in
June 2004.
OUTLOOK
Shown below are our 2004 planning assumptions, operational metrics
milestones and financial results milestones and our outlook for achieving these
milestones:
Full Year
Base Outlook
Planning Assumptions
--------------------
Industry volume (SAAR) - U.S. 17.0 million units 17.0
Europe 16.9 million units 17.2
Milestone
Operation Metrics
-----------------
Quality Improve in all regions On Track
Market share Flat or improve in all regions Mixed
Automotive cost performance a/ Improve by at least $500 million Better
Capital spending $7 billion Lower
Operating-related cash flow b/ $1.2 billion positive On Track
Financial Results Pre-tax income c/
----------------- --------------
(in billions)
Automotive
Americas
Ford North America $ 1.5 - $ 1.7 On Track/Better
Ford South America (0.1) - 0 On Track
Ford Europe/PAG
Ford Europe (0.2) - (0.1) On Track/Better
PAG 0.5 - 0.6 Worse
Ford Asia Pacific and Africa
/Mazda 0 - 0.1 On Track
----- -----
Total Automotive 0.9 - 1.1 On Track
Financial Services 2.6 - 2.7 Better
----- -----
Total Company $ 3.5 - $ 3.8 Better
===== =====
- ----------
a/ At constant volume, mix and exchange; excluding special items.
b/ Excluding pension/long-term VEBA contributions and tax refunds.
c/ Excluding special items.
Second quarter 2004 results included the effect of favorable experience
related to prior-year tax matters, which resulted in an effective tax rate of
20% for the quarter. We expect our effective tax rate for the remainder of the
year to average about 28%, for a full-year effective rate of about 26%.
We continue to believe that our Automotive sector is on track to achieve
$0.9 to $1.1 billion of pre-tax income in 2004, excluding special items. Our
present expectation is that Ford North America and Ford Europe will meet or
slightly exceed the full year milestones. Ford South America and Ford Asia
Pacific and Africa/Mazda appear to be on track to meet the full year milestones.
We do not expect that PAG will meet the full year milestone of $500 million to
$600 million in pre-tax profit and is unlikely to achieve breakeven for the
year. We are assessing business improvement actions for PAG, particularly at
Jaguar.
Second quarter 2004 results for the Financial Services sector again
exceeded our expectations and we continue to expect that the Financial Services
sector will exceed the full year earnings milestone of $2.6 - $2.7 billion in
pre-tax profit.
Overall, we expect to exceed our total company milestone for pre-tax
income, excluding special items. Based on present conditions, we expect special
items for the full year to be about $260 million pre-tax (or about $0.08 per
share) consisting primarily of charges related to the revaluation and
restructuring of our investment in fuel cell technologies and completion of the
Ford Europe restructuring actions.
29
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
The pricing and competitive environment in the automotive industry remains
intense and may intensify further in the balance of the year due to the high
level of dealer inventories across the industry and many new products scheduled
to be introduced in 2004 by various manufacturers.
Based on the foregoing and subject to the risks described under "Risk
Factors" below, we expect third quarter per share earnings to be in the range of
breakeven to $0.05, from continuing operations and excluding special items. For
full-year 2004, we have increased our per share earnings guidance by $0.15 from
a range of $1.65 to $1.75 to a range of $1.80 to $1.90, from continuing
operations and excluding special items. This increase reflects our expectation
that our Financial Services sector will exceed our previous guidance, as well as
the effect of the change to our full-year tax rate to about 26% as discussed
above.
RISK FACTORS
Statements included or incorporated by reference herein may constitute
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve a number of risks,
uncertainties, and other factors that could cause actual results to differ
materially from those stated, including, without limitation:
o greater price competition resulting from currency fluctuations, industry
overcapacity or other factors;
o a significant decline in industry sales, particularly in the U.S. or
Europe, resulting from slowing economic growth, geo-political events or
other factors;
o lower-than-anticipated market acceptance of new or existing products;
o work stoppages at key Ford or supplier facilities or other interruptions of
supplies;
o the discovery of defects in vehicles resulting in delays in new model
launches, recall campaigns or increased warranty costs;
o increased safety, emissions, fuel economy or other regulation resulting in
higher costs and/or sales restrictions;
o unusual or significant litigation or governmental investigations arising
out of alleged defects in our products or otherwise;
o worse-than-assumed economic and demographic experience for our post
retirement benefit plans (e.g., investment returns, interest rates, health
care cost trends, benefit improvements);
o currency or commodity price fluctuations;
o changes in interest rates;
o a market shift from truck sales in the U.S.;
o economic difficulties in any significant market;
o reduced availability of or higher prices for fuel;
o labor or other constraints on our ability to restructure our business;
o a change in our requirements under long-term supply arrangements under
which we are obligated to purchase minimum quantities or pay minimum
amounts;
o credit rating downgrades;
o inability to access debt or securitization markets around the world at
competitive rates or in sufficient amounts;
o higher-than-expected credit losses;
o lower-than-anticipated residual values for leased vehicles;
o increased price competition in the rental car industry and/or a general
decline in business or leisure travel due to terrorist attacks, acts of
war, epidemic disease or measures taken by governments in response thereto
that negatively affect the travel industry; and
o our inability to implement the Revitalization Plan.
OTHER FINANCIAL INFORMATION
The interim financial information included in this Quarterly Report on Form
10-Q for the quarter ended June 30, 2004 has not been audited by
PricewaterhouseCoopers LLP ("PwC"). In reviewing such information, PwC has
applied limited procedures in accordance with professional standards for reviews
of interim financial information. Accordingly, you should restrict your reliance
on their reports on such information. PwC is not subject to the liability
provisions of Section 11 of the Securities Act of 1933 for their reports on the
interim financial information because such reports do not constitute "reports"
or "parts" of the registration statements prepared or certified by PwC within
the meaning of Sections 7 and 11 of the Securities Act of 1933.
30
Item 3. Quantitative and Qualitative Discussion about Market Risks
There is no material change in the information reported under Part II, Item
7A of our 10-K Report.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. William Clay Ford, Jr.,
our Chief Executive Officer, and Donat R. Leclair, our Chief Financial Officer,
have performed an evaluation of the Company's disclosure controls and
procedures, as that term is defined in Rule 13a-14 (c) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as of June 30, 2004 and
each has concluded that such disclosure controls and procedures are effective to
ensure that information required to be disclosed in our periodic reports filed
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified by the Securities and Exchange Commission's rules and
regulations.
Change in internal controls. No changes in the Company's internal controls over
financial reporting occurred during the quarter ended June 30, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
Product liability Matters
- -------------------------
Buell-Wilson v. Ford. During December 2002, an action was filed in Superior
Court in San Diego County, California, alleging that defects in stability, roof
strength and warnings in a 1997 Ford Explorer caused an accident in which the
plaintiff was seriously injured. In June of 2004, the jury rendered a verdict in
favor of the plaintiff and ordered us to pay $122.6 million in compensatory
damages and $246 million in punitive damages. We have filed motions for judgment
notwithstanding the verdict and for a new trial. If those motions are denied, we
will appeal to the California Court of Appeals.
F-150 Radiator Class Actions. (Previously discussed on page 29 of the 10-K
Report). The Texas Court of Appeals reversed the class certification orders and
remanded the case to the trial court for further proceedings. Additional
purported statewide class action suits with similar allegations and claims for
relief have been filed in state courts in Bibb County, Georgia and in Madison
County, Illinois.
31
Item 2. Changes in Securities and Use of Proceeds
During the second quarter of 2004, we issued a total of 23,099 shares of
our common stock under our Restricted Stock Plan for Non-Employee Directors to
certain directors as part of their total compensation. Such shares were not
registered pursuant to the Securities Act of 1933, as amended, in reliance on
Section 4(2) thereof.
During the second quarter of 2004, we purchased shares of our Common Stock
as follows:
Total Number of Maximum Number (or
Shares Purchased as Approximate Dollar Value) of
Total Number of Average Part of Publicly Shares that May Yet Be
Shares Purchased Price Paid Announced Plans or Purchased Under the Plans or
Period a/ per Share Programs Programs
- --------------------------- ------------------ ------------ ----------------------- -------------------------------
April 1, 2004
through No publicly announced
April 30, 2004 1,587,194 $14.27 0 repurchase program in place
May 1, 2004
through No publicly announced
May 31, 2004 1,535,414 $14.64 0 repurchase program in place
June 1, 2004
through No publicly announced
June 30, 2004 1,671,811 $15.49 0 repurchase program in place
--------- -
Total 4,794,419 $14.81 0
========= =
- ----------
a/ We currently do not have a publicly announced repurchase program in place.
Of the 4,794,419 shares purchased, 4,784,243 shares were purchased from the
Ford Motor Company Savings and Stock Investment Plan for Salaried Employees
("SSIP") and the Tax Efficient Savings Plan for Hourly Employees
("TESPHE"). Shares are generally purchased from the SSIP and TESPHE when
participants in those plans elect to sell units in the Ford Stock Fund upon
retirement, upon termination of employment with the Company, related to an
in-service distribution, or to fund a loan against an existing account
balance in the Ford Stock Fund. Shares are not purchased from these plans
when a participant transfers account balances out of the Ford Stock Fund
and into another investment option under the plans. The remaining shares
were acquired from our employees or former employees in accordance with our
various compensation plans as a result of share withholdings to pay income
taxes with respect to (i) the lapse of restrictions on restricted stock,
(ii) the issuance of stock as a result of the conversion of restricted
stock equivalents awarded to our executives or directors, or to pay the
exercise price and related income taxes with respect to the exercise of a
stock option.
Item 5. Other Information
Governmental Standards
- ----------------------
Mobile Source Emissions Control -- U.S. Requirements. Environmental
agencies in the states of New Jersey, Connecticut, and Rhode Island are all in
the process of developing regulations adopting California's motor vehicle
emissions standards. Connecticut enacted a law in May 2004 requiring adoption of
the California standards, and Rhode Island is proceeding on the basis of past
legislation granting authority to enact motor vehicle standards more stringent
than federal standards under certain circumstances. It appears that each of
these states will adopt California's requirements for manufacturers to produce
and deliver for sale zero-emission vehicles, which produce no emissions of
regulated pollutants ("ZEV"). These states have not yet determined how to
address the fact that manufacturers have already accumulated substantial ZEV
credits in California. If a state were to adopt the ZEV mandate without taking
into account the accumulated credits and their application toward compliance in
California, that state's ZEV rules would become far more onerous than
California's ZEV rules going forward.
Motor Vehicle Fuel Economy -- U.S. Requirements. In June 2004, the
California Air Resources Board ("CARB") issued a draft Staff Report containing
its proposed regulations for controlling greenhouse gas emissions from motor
vehicles. Under the draft report, the new standards would begin taking effect in
the 2009 model year and would get increasingly more stringent through the 2014
model year. The proposed standards for the 2014 MY are equivalent to a CAFE
standard of more than 40 mpg for passenger cars and more than 28 mpg for light
trucks. CARB is expected to issue a final Staff Report for public comment in
August 2004, and vote on the proposal at a public hearing in September 2004.
32
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Please refer to the Exhibit Index on Page 34.
(b) Reports on Form 8-K
-------------------
The Registrant filed the following Current Reports on Form 8-K during
the quarter ended June 30, 2004:
Current report on Form 8-K dated April 1, 2004 included information
relating to U.S. retail sales of Ford vehicles in March 2004.
Current report on Form 8-K dated April 21, 2004 included information
relating to Ford's first quarter 2004 financial results.
Current report on Form 8-K dated April 22, 2004 included information
relating to executive appointments.
Current report on Form 8-K dated May 3, 2004 included information
relating to U.S. retail sales of Ford vehicles in April 2004.
Current report on Form 8-K dated June 2, 2004 included information
relating to U.S. retail sales of Ford vehicles in May 2004.
Current report on Form 8-K dated June 16, 2004 included information
relating to second quarter earnings guidance.
SIGNATURE
Pursuant to the requirements 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 COMPANY
-------------------------------------
(Registrant)
Date: August 5, 2004 By: /s/Donat R. Leclair
-------------- ----------------------------------
Donat R. Leclair
Group Vice President and
Chief Financial Officer
33
EXHIBIT INDEX
-------------
Designation Description Method of Filing
------------------ ------------------------------------------------------------------------------------------------------
Exhibit 10.1 Agreement dated April 28, 2004 between Ford Filed with this Report
and David W. Thursfield
Exhibit 10.2 Amendment dated June 4, 2004 to Agreement Filed with this report
between Ford and David W. Thursfield dated April
28, 2004
Exhibit 12 Ford Motor Company and Subsidiaries Calculation Filed with this Report
of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
Exhibit 15 Letter of PricewaterhouseCoopers LLP, Independent Filed with this Report
Accountants, dated August 5, 2004, relating to
Financial Information
Exhibit 31.1 Rule 15d-14(a) Certification of CEO Filed with this Report
Exhibit 31.2 Rule 15d-14(a) Certification of CFO Filed with this Report
Exhibit 32.1 Section 1350 Certification of CEO Filed with this Report
Exhibit 32.2 Section 1350 Certification of CFO Filed with this Report
34