EXHIBIT 99 - Sections of Items 1, 3, 6, 7 and 7A of Ford Motor Company's Annual
Report on Form 10-K for the year ended December 31, 2001. (EXCLUDES INFORMATION
DIRECTLY CONCERNING FORD CREDIT THAT IS ALREADY DISCLOSED IN FORD CREDIT'S
ANNUAL REPORT ON FORM 10-K. ALL REFERENCES TO WE, OUR AND US IN THIS EXHIBIT 99
REFER TO FORD MOTOR COMPANY.)
ITEM 1. BUSINESS
Ford Motor Company was incorporated in Delaware in 1919. We acquired
the business of a Michigan company, also known as Ford Motor Company,
incorporated in 1903 to produce and sell automobiles designed and engineered by
Henry Ford. We are the world's second-largest producer of cars and trucks
combined. We and our subsidiaries also engage in other businesses, including
financing and renting vehicles and equipment.
OVERVIEW
Our business is divided into two business sectors: the Automotive
sector and the Financial Services sector. We manage these sectors as three
primary operating segments as described below.
Business Sectors Operating Segments Description
Automotive:
Automotive design, manufacture, sale,
and service of cars and
trucks
Financial Services:
Ford Motor Credit Company vehicle-related financing,
leasing, and insurance
The Hertz Corporation renting and leasing of cars
and trucks and renting
industrial and construction
equipment, and other
activities
We provide financial information (such as, revenues, income, and
assets) for each of these business sectors and operating segments in three areas
of this Report: (1) Item 6. "Selected Financial Data" on pages 36 through 38;
(2) Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 39 through 57; and (3) Note 18 of the Notes to
our Consolidated Financial Statements located at the end of this Report (page
FS-21). Financial information relating to certain geographic areas is also
included in the above-mentioned areas of this Report.
Revitalization Plan
Following an extensive review of our North and South American
operations, on January 11, 2002, we announced a revitalization plan (the
"Revitalization Plan") that includes the following elements:
- New products: A product-led revitalization program that will result in
the introduction of 20 new or freshened products in the United States
annually between now and mid-decade.
- Plant capacity: Reduction of North American plant manufacturing
operating capacity by about one million vehicles by mid-decade to
realign capacity with market conditions.
- Hourly workforce: About 12,000 hourly employees in North America
are affected by actions completed in December 2001 or to be taken
throughout 2002 and beyond. An additional 3,000 hourly employees were
affected in 2001. Plans are being made to reassign as many plant
employees as possible.
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- Salaried workforce: Our 2001 voluntary separation program for
salaried employees and other related actions resulted in a
3,500-person workforce reduction in North America. This program will
be extended to achieve an additional 1,500-person salaried workforce
reduction to reach the goal of 5,000. If necessary to meet this goal,
an involuntary separation program will be used.
- Global workforce: More than 35,000 employees will be affected by
combined actions around the world by mid-decade. These include:
21,500 in North America - 15,000 hourly, 5,000 salaried and 1,500
agency employees - and 13,500 in the rest of the world.
- Material costs: A material cost-reduction program has been
initiated with North American suppliers which shares design savings,
with Ford receiving 65 percent of implemented cost reductions and
suppliers receiving 35 percent in the first year. Designs will be
developed that will help improve our products and overall quality.
This program, along with other material cost reduction efforts, is
expected to improve ongoing annual profits before taxes by $3 billion
by mid-decade.
- Discontinued low-margin models: The Mercury Cougar, Mercury
Villager, Lincoln Continental and Ford Escort will be discontinued
this year.
- Beyond North America: Revitalization plans beyond North American
automotive operations include the continued implementation of the
European transformation strategy, the Premier Automotive Group
strategy, the turnaround in South America and a revised direction for
Ford Motor Credit Company.
- Divestitures: We are pursuing the sale of non-core assets and
businesses. Our plan includes $1 billion of cash realization from
these actions in 2002.
Manufacturing plans over the next several years include: 1) closing
five plants: Edison Assembly, Ontario Truck Plant, St. Louis Assembly, Cleveland
Aluminum Casting and Vulcan Forge; 2) no new products have been identified for
two plants: Ohio Assembly and Cuautitlan Assembly; 3) pursuing the sale of
Woodhaven Forging Plant; 4) major downsizing and shift reductions at eleven
plants; and 5) line speed reductions and changes to operating patterns at nine
plants.
AUTOMOTIVE SECTOR
We sell cars and trucks throughout the world. In 2001, we sold
approximately 7 million vehicles throughout the world. Our automotive vehicle
brands include Ford, Mercury, Lincoln, Volvo, Jaguar, Land Rover, Aston Martin
and TH!NK. Substantially all of our cars, trucks and parts are marketed through
retail dealers in North America, and through distributors and dealers outside of
North America. At December 31, 2001, the approximate number of dealers and
distributors worldwide distributing our vehicle brands was as follows: Ford,
over 13,000; Mercury, 2,229; Lincoln, 1,610; Volvo, 2,500; Jaguar, 694; Land
Rover, 2,300; Aston Martin, 81; TH!NK 69. Because many dealerships distribute
more than one of our brands from the same sales location, a single dealership
may be counted under more than one brand in the previous sentence.
The worldwide automotive industry, Ford included, is affected
significantly by a number of factors over which we have little control,
including general economic conditions. In the United States, the automotive
industry is a highly-competitive, cyclical business that has a wide variety of
product offerings. The number of cars and trucks sold to retail buyers (commonly
referred to as "industry demand") can vary substantially from year to year. In
any year, industry demand depends largely on general economic conditions, the
cost of purchasing and operating cars and trucks, and the availability and cost
of credit and fuel. Industry demand also reflects the fact that cars and trucks
are durable items that people generally can wait to replace.
The worldwide automotive industry consists of many producers, with no
single dominant producer. Certain manufacturers, however, account for the major
percentage of total sales within particular countries, especially their
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countries of origin. Most of the factors that affect the United States
automotive industry and its sales volumes and profitability are equally relevant
outside the United States.
The worldwide automotive industry also is affected significantly by a
substantial amount of costly governmental regulation. In the United States and
Europe, for example, governmental regulation has arisen primarily out of concern
for the environment, for greater vehicle safety, and for improved fuel economy.
Many governments also regulate local content and/or impose import requirements
as a means of creating jobs, protecting domestic producers, or influencing their
balance of payments.
Our unit sales vary with the level of total industry demand and our
share of that industry demand. Our share is influenced by how our products
compare with those offered by other manufacturers based on many factors,
including price, quality, styling, reliability, safety, and functionality. Our
share also is affected by our timing of new model introductions and
manufacturing capacity limitations. Our ability to satisfy changing consumer
preferences with respect to type or size of vehicle and its design and
performance characteristics can impact our sales and earnings significantly.
The profitability of vehicle sales is affected by many factors,
including the following:
- unit sales volume
- the mix of vehicles and options sold
- the margin of profit on each vehicle sold
- the level of "incentives" (price discounts) and other marketing
costs
- the costs for customer warranty claims and other customer
satisfaction actions
- the costs for government-mandated safety, emission and fuel economy
technology and equipment
- the ability to manage costs
- the ability to recover cost increases through higher prices
Further, because Ford and other manufacturers have a high proportion of costs
that are fixed (including relatively fixed labor costs), relatively small
changes in unit sales volumes can dramatically affect overall profitability.
Therefore, should industry demand soften because of slowing or negative economic
growth in the major markets in which we operate, or should our share of total
industry sales decline, our profitability will be adversely affected. In recent
years, industry sales of vehicles in the United States have been at record
levels (17.5, 17.8 and 17.4 million units in 2001, 2000 and 1999 respectively).
In 2002, however, we expect industry sales volumes in the United States to be
about 16.5 million units and we expect to incur significant losses in our
Automotive segment in 2002.
Following is a discussion of the automotive industry in the principal
markets where we compete, as well as a discussion of our Ford Customer Service
Division:
UNITED STATES
Sales Data. The following table shows U.S. industry sales of cars and
trucks for the years indicated:
U. S. Industry Sales
(millions of units)
Years Ended December 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- ---------- --------- ----------
Cars........................................ 8.4 8.8 8.7 8.2 8.3
Trucks...................................... 9.1 9.0 8.7 7.8 7.2
---- ---- ---- ---- ----
Total....................................... 17.5 17.8 17.4 16.0 15.5
==== ==== ==== ==== ====
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We classify cars by small, middle, large and luxury segments and trucks
by compact pickup, bus/van, full-size pickup, sport utility vehicles and
medium/heavy segments. The large and luxury car segments and the bus/van,
full-size pickup and sport utility vehicle segments include the industry's most
profitable vehicle lines. The term "bus" as used in this discussion refers to
vans designed to carry passengers. The following tables show the proportion of
United States car and truck unit sales by segment for the industry (including
Japanese and other foreign-based manufacturers) and Ford for the years
indicated:
U. S. Industry Vehicle Sales by Segment
----------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- ---------- --------- ----------
CARS
Small ....................... 16.7% 16.7% 16.1% 16.9% 18.1%
Middle ...................... 21.6 22.9 23.8 23.6 24.7
Large ....................... 2.7 2.9 3.2 3.7 4.3
Luxury ...................... 7.2 7.2 6.8 6.8 6.3
----- ----- ----- ----- -----
Total U.S. Industry Car Sales 48.2 49.7 49.9 51.0 53.4
----- ----- ----- ----- -----
TRUCKS
Compact Pickup .................. 5.2% 5.9% 6.2% 6.7% 6.4%
Bus/Van ......................... 8.8 10.0 10.1 10.1 10.4
Full-Size Pickup ................ 13.2 12.4 12.7 12.4 12.0
Sport Utility Vehicles .......... 23.0 19.8 18.5 17.5 15.7
Medium/Heavy .................... 1.6 2.2 2.6 2.3 2.1
----- ----- ----- ----- -----
Total U.S. Industry Truck Sales . 51.8 50.3 50.1 49.0 46.6
----- ----- ----- ----- -----
Total U.S. Industry Vehicle Sales 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Ford Vehicle Sales by Segment in U.S.
-----------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- ---------- --------- ----------
CARS
Small ....................... 13.9% 14.5% 13.5% 13.1% 12.7%
Middle ...................... 11.4 13.0 15.5 16.7 19.6
Large ....................... 5.2 5.1 5.7 5.7 5.6
Luxury ...................... 7.0 7.5 6.2 4.2 4.1
----- ----- ----- ----- -----
Total Ford U.S. Car Sales ... 37.7 40.1 40.9 39.7 42.0
----- ----- ----- ----- -----
TRUCKS
Compact Pickup .............. 6.9% 7.9% 8.4% 8.4% 7.7%
Bus/Van ..................... 9.1 10.5 11.0 11.1 12.6
Full-Size Pickup ............ 22.9 20.9 20.9 21.3 19.3
Sport Utility Vehicles ...... 23.2 20.4 18.5 19.1 17.3
Medium/Heavy* ............... 0.2 0.2 0.3 0.4 1.1
----- ----- ----- ----- -----
Total Ford U.S. Truck Sales . 62.3 59.9 59.1 60.3 58.0
----- ----- ----- ----- -----
Total Ford U.S. Vehicle Sales 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
*In 1997 Ford sold its heavy truck businesses in North America and Australia/New
Zealand to Freightliner Corporation. Ford ceased production of heavy trucks in
North America in December 1997. The transfer of the North American and
Australian heavy truck businesses was completed in 1998.
As shown in the tables above, since 1997 there has been a shift from
cars to trucks for both industry sales and Ford sales. Ford's sales of the
middle car segment as a percentage of its total sales has deteriorated more than
the general decline of the industry sales in that segment because of the
discontinuance of certain product offerings in the segment (e.g., Ford
Thunderbird and Contour and Mercury Mystique) and, more recently, lower fleet
sales of the Ford Taurus model.
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Market Share Data. The following tables show changes in car and truck
United States market shares of the six leading vehicle manufacturers for the
years indicated:
U.S. Car Market Shares*
------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- ---------- --------- ----------
Ford**................................... 17.7% 19.1% 19.9% 20.4% 20.8%
General Motors........................... 27.0 28.6 29.3 29.8 32.2
DaimlerChrysler***....................... 8.5 9.1 10.3 10.7 10.2
Toyota................................... 11.3 11.0 10.2 10.6 9.9
Honda.................................... 10.7 10.0 9.8 10.6 10.0
Nissan................................... 4.9 4.8 4.6 5.0 5.7
All Other****............................ 19.9 17.4 15.9 12.9 11.2
------ ------ ------ ------ ------
Total U.S. Car Retail Deliveries...... 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
U.S. Truck Market Shares*
------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- ---------- --------- ----------
Ford**................................... 27.4% 28.3% 28.6% 30.5% 31.4%
General Motors........................... 28.9 27.0 27.8 27.5 28.8
DaimlerChrysler***....................... 19.5 21.5 22.2 23.2 21.9
Toyota................................... 8.7 7.2 6.7 6.3 5.7
Honda.................................... 3.4 3.1 2.6 1.9 1.5
Nissan................................... 3.2 3.7 3.2 2.7 3.6
All Other*****........................... 8.9 9.2 8.9 7.9 7.1
------ ------ ------ ------ ------
Total U.S. Truck Retail Deliveries.... 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
U.S. Combined Car and Truck Market Shares*
------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- ---------- --------- ----------
Ford**................................... 22.8% 23.7% 24.3% 25.3% 25.8%
General Motors........................... 28.0 27.8 28.5 28.7 30.6
DaimlerChrysler***....................... 14.2 15.3 16.3 16.8 15.6
Toyota................................... 10.0 9.1 8.5 8.5 7.9
Honda.................................... 6.9 6.6 6.2 6.3 6.0
Nissan................................... 4.1 4.3 3.9 3.9 4.7
All Other****............................ 14.0 13.2 12.3 10.5 9.4
------ ------ ------ ------ ------
Total U.S. Car and Truck Retail Deliveries 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
- --------------------
* All U.S. retail sales data are based on publicly available information
from the media and trade publications.
** Ford purchased Volvo Car on March 31, 1999 and Land Rover on June 30,
2000. The figures shown here include Volvo Car and Land Rover on a pro
forma basis for the periods prior to their acquisition by Ford. During the
period from 1997 through 1998, Volvo Car represented no more than 1.2
percentage points of total market share during any one year. During the
period 1997 through 1999, Land Rover represented no more than 0.4
percentage points of total market share during any one year.
*** Chrysler and Daimler-Benz merged in late 1998. The figures shown here
combine Chrysler and Daimler-Benz (excluding Freightliner and Sterling
Heavy Trucks) on a pro forma basis for the periods prior to their
merger.
**** "All Other" includes primarily companies based in various European
countries, Korea and other Japanese manufacturers. The increase in
combined market share shown for "All Others" reflects primarily
increases in market share for European manufactures (e.g., BMW) and the
Korean manufacturers (e.g., Hyundai and Kia).
***** "All Other" in the U.S. Truck Market Shares table includes primarily
companies based in various European countries, Korea and other Japanese
manufacturers. The decrease in combined market share from 2000 to 2001
shown for "All Others" in this table reflects primarily decreases in
market share for heavy truck manufacturers.
The decline in overall market share for Ford in 2001 and in Ford's
truck market share since 1997 is primarily the result of increased competition
and, in particular, an increased number of new competitive product offerings
mainly from foreign manufacturers.
Marketing Incentives and Fleet Sales. Automotive manufacturers that
sell vehicles in the United States typically give purchasers price discounts or
other marketing incentives. These incentives are the result of competition from
new product offerings by manufacturers and the desire to maintain production
levels and market shares. Manufacturers provide these incentives to both retail
and fleet customers (fleet
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customers include daily rental companies, commercial fleet customers, leasing
companies and governments). Marketing incentives generally are higher during
periods of economic downturns, when excess capacity in the industry tends to
increase. We estimate that there exists presently about five to six million
units of excess capacity in North America.
Our marketing costs for the Ford, Lincoln and Mercury brands in the
United States as a percent of gross sales revenue for those brands were as
follows for the three years indicated: 14.7% (2001), 11.1% (2000), and 10.6%
(1999). In the fourth quarter of 2001, our United States marketing costs as a
percent of gross sales revenue for those brands was 16.7%. These "marketing
costs" include primarily (i) marketing incentives on vehicles, such as retail
rebates and costs for special financing and lease programs, (ii) reserves for
costs and/or losses associated with our required repurchase of certain vehicles
sold to daily rental companies, and (iii) costs for advertising and sales
promotions for vehicles. The increase in marketing costs over the last several
years is a result of intense competition in the United States market.
Fleet sales generally are less profitable than retail sales, and sales
to daily rental companies generally are less profitable than sales to other
fleet purchasers. The mix between sales to daily rental companies and other
fleet customers has been about evenly split in recent years. The table below
shows our fleet sales in the United States, and the amount of those sales as a
percentage of our total United States car and truck sales, for the last five
years.
Ford Fleet Sales
------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- ---------- --------- ----------
Units sold......................................... 885,000 977,000 940,000 878,000 923,000
Percent of Ford's total U.S. car and truck sales... 22% 23% 23% 22% 24%
Warranty Coverage. We presently provide warranty coverage for defects
in factory-supplied materials and workmanship on all vehicles (other than medium
trucks) in the United States. This warranty coverage for Ford/Mercury vehicles
extends for 36 months or 36,000 miles (whichever occurs first) and covers
components of the vehicle, including tires beginning January 1, 2001 for 2001
and later model years. Prior to January 1, 2001, tires were warranted only by
the tire manufacturers. The United States warranty coverage for 2002 and later
model years TH!NK Neighbor vehicles extends for 36 months with unlimited miles.
The United States warranty coverage for luxury vehicles (Lincoln, Jaguar, Volvo,
and Land Rover) extends for 48 months or 50,000 miles (whichever occurs first)
but, except for Lincoln beginning January 1, 2001, does not include tires, which
are warranted by the tire manufacturers. In general, different warranty coverage
is provided on medium trucks and on vehicles sold outside the United States.
Warranty coverage for safety restraint systems (safety belts, air bags and
related components) extends for 60 months or 50,000 miles (whichever occurs
first) and 60 months with unlimited miles for 2002 and later model years TH!NK
Neighbor vehicles. Also, corrosion damage resulting in perforation (holes) in
body sheet metal panels is covered on 1995 and newer models for 60 months
(unlimited mileage). In addition, the Federal Clean Air Act requires warranty
coverage for 8 years or 80,000 miles (whichever occurs first) for emissions
equipment (catalytic converter and powertrain control module) on most light duty
vehicles sold in the United States. As a result of these warranties and the
concern for customer satisfaction, costs for warranty repairs, emissions
equipment repairs, and customer satisfaction actions ("warranty costs") can be
substantial. Estimated warranty costs for each vehicle sold by us are accrued at
the time of sale. Such accruals, however, are subject to adjustment from time to
time depending on actual experience.
EUROPE
Market Share Information. Outside of the United States, Europe is our
largest market for the sale of cars and trucks. The automotive industry in
Europe is intensely competitive. Over the past year, we estimate that 145 new or
freshened vehicles, including derivatives of existing vehicles, were introduced
in the European market by various manufacturers. For the past 10 years, the top
six manufacturers have collectively held between 73% and 77% of the total car
market, and have each achieved a car market share in about the 9% to 19% range.
(Manufacturers' shares, however, vary considerably by country.) This competitive
environment is expected to intensify further as Japanese manufacturers increase
their production capacity, and all of the manufacturers of premium brands (e.g.,
BMW, Mercedes Benz and Audi) continue to broaden their product offerings. We
estimate that in 2001 the European automotive industry had excess capacity of
approximately six million units (based on a comparison of European domestic
demand and capacity).
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In 2001, vehicle manufacturers sold approximately 17.8 million cars and
trucks in Europe, about the same as 2000 levels. Our combined car and truck
market share in Europe in 2001 was 10.7%, up 7/10 of one percentage point from
2000.
Britain and Germany are our most important markets within Europe,
although the Southern European countries are becoming increasingly significant.
Any adverse change in the British or German market has a significant effect on
our total European automotive profits. For 2001 compared with 2000, total
industry sales were up 10% in Britain and down 2% in Germany.
For purposes of the figures shown in this section, we have considered
Europe to consist of the following 19 markets: Britain, Germany, France, Italy,
Spain, Austria, Belgium, Ireland, Netherlands, Portugal, Switzerland, Finland,
Sweden, Denmark, Norway, Czech Republic, Greece, Hungary, and Poland.
Motor Vehicle Distribution in Europe. On February 5, 2002, the European
Commission proposed a new regulation that would change the way motor vehicles
are sold and repaired throughout the European Community. While Ford could
continue to maintain its "exclusive" distribution arrangements that allow it to
provide dealers with exclusive sales territories, the new rules would eliminate
the presently allowable restrictions on resale. This means that our dealers
could sell vehicles to any reseller (e.g., supermarket chains, internet agencies
and other resellers not authorized by us) who in turn could sell to end
customers both within and outside of the dealer's exclusive sales territory.
Alternatively, manufacturers could establish a "selective" distribution regime
that would allow the manufacturer to determine the number but not the location
of its dealers. Dealers also would be free to set up additional sales or
delivery outlets within the European Union and provide active sales to all
customers within the European Union, but not sell motor vehicles to resellers
not authorized by the manufacturer. Under both systems, the new rules would make
it easier for a dealer to display and sell multiple brands in one store without
the need to maintain separate facilities.
The Commission also has proposed sweeping changes to the repair
industry. Dealers could no longer be required by the manufacturer to perform
repair work. Instead, dealers could subcontract the work to independent repair
shops that met reasonable criteria set by the manufacturer. These "official"
repair facilities could perform warranty and recall work, in addition to other
repair and maintenance work. While a manufacturer could continue to require the
use of its parts in warranty and recall work, the repair facility could use
parts made by others that were of comparable quality for all other repair work.
It is difficult to quantify at this time the full impact of these
changes on our European operations. The Commission, however, has stated that it
expects the new rules to lead to increased competition and a narrowing of car
prices from country to country. The new rules, coupled with the introduction of
the new single currency, are likely to put downward pressure on prices for both
vehicles and vehicle parts. Our existing dealer agreements will be modified by
October 1, 2003 when the new rules are expected to apply.
OTHER MARKETS
Mexico and Canada. Mexico and Canada also are important markets for us.
In 2001, industry sales of new cars and trucks in Mexico were approximately
948,000 units, up approximately 7% from 2000 levels. In Canada, industry sales
of new cars and trucks in 2001 were approximately 1.59 million units, up 0.7%
from 2000 levels. Our combined car and truck market share in these markets in
2001 was 17.3% (Mexico) and 16.6% (Canada).
South America. Brazil and Argentina are our principal markets in South
America. The economic environment in those countries has been volatile in recent
years, leading to large variations in industry sales. Results have also been
influenced by the devaluation of the Brazilian Real and Argentina Peso,
continued weak economic conditions and government actions to reduce inflation
and public deficits. Industry sales in 2001 were 1.6 million units in Brazil, up
about 10% from 2000, and approximately 201,000 units in Argentina, down 41% from
2000. Our combined car and truck market share in these markets in 2001 was 7.8%
in Brazil (down 1.3% from last year) and 14.3% in Argentina (down 0.6% from a
year ago).
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Ford has undertaken restructuring actions in recent years to improve
our competitiveness in South America. In addition, we are building a new
assembly plant in Brazil, which will manufacture a new family of vehicles for
the South American markets. The new plant will start building the 5-door Fiesta
in the spring of 2002 and begin producing an all-new sport utility vehicle next
year.
Asia Pacific. In the Asia Pacific region, Australia, Taiwan, Thailand
and Japan are our principal markets. Industry volumes in 2001 in this region
were as follows: approximately 773,000 units in Australia (down 1.9% from 2000),
approximately 347,400 units in Taiwan (down 17.4% from 2000), approximately
297,000 units in Thailand (up 13.4% from 2000) and approximately 5.9 million
units in Japan (down 1.0% from 2000). In 2001, our combined car and truck market
share in Australia was 15.1%. In Taiwan, we had a combined car and truck market
share in 2001 of 14.9%. In Thailand, our combined car and truck market share was
6.5% in 2001. Our combined car and truck market share in Japan has been less
than 1% in recent years. We own a 33.4% interest in Mazda Motor Corporation and
account for Mazda on an equity basis. Mazda's market share in Japan has been in
the 5% range in recent years. Our principal competition in the Asia Pacific
region has been the Japanese manufacturers. We anticipate that the continuing
relaxation of import restrictions (including duty reductions) will intensify
competition in the region.
We opened a new assembly plant in India in 1999, launching an all-new
small car (the Ikon) designed specifically for that market. In 2001,
approximately 14,800 Ikons were produced for sale in India. In addition, India
commenced sale of Ikon CKD (completely knocked down) kits to Mexico and South
Africa, exporting 28,150 CKD kits to these two countries in 2001. We expect
India to become one of our most important markets in Asia in the future.
Africa. In recent years, we have operated in the South African market
as a 45% owner in the South African Motor Corporation (Pty.) Limited ("SAMCOR").
In 2000, we increased our ownership interest in SAMCOR to 100% by purchasing the
remaining 55% we did not previously own. Subsequent to this purchase, SAMCOR's
name was changed to Ford Motor Company of Southern Africa ("FMCSA").
FMCSA assembles and distributes Ford, Mazda, Volvo and, beginning in
2001, Land Rover vehicles in South Africa. In addition, FMCSA distributes Jaguar
vehicles. In 2001, industry volume in South Africa was approximately 367,000
units, up 7.6% from 2000 levels. FMCSA's combined car and truck market share in
2001 was 15.1% for the five brands it distributes.
FORD CUSTOMER SERVICE DIVISION
Ford Customer Service Division is a business unit within Ford that
supports customers of Ford, Lincoln and Mercury brand vehicles through a network
of franchised dealers. This is the principal source of vehicle service and
customer support for our vehicle owners within these brands, traditionally
recognized by the Quality Care(SM) brand. Ford Customer Service Division's
first, and most critical, role within the organization is to provide the service
parts, tools, technology & support to facilitate the dealer network to achieve
high levels of customer service satisfaction and owner loyalty. Beyond the
traditional Ford, Lincoln and Mercury Dealerships, Ford Customer Service
Division also works together with the other Ford trustmark brands to optimize
our dealer service business and share best practices.
Ford Customer Service Division was part of our former Automotive
Consumer Services Group that also included the Diversified Consumer Services
Organization. That organization contains businesses that provide services to
vehicle owners for all automotive brands. As part of our Revitalization Plan,
discussed below under Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations," we plan to focus primarily on our dealer
network for traditional vehicle service and customer support. In addition, we
will decrease our involvement in selected businesses in our Diversified Consumer
Services organization -- we have announced that we are evaluating the sale or
partial disposition of Kwik-Fit, our European maintenance and light repair
business, Collision Team of America, a U.S. chain of collision repair centers
and GreenLeaf LLC, a chain of automotive recycling centers in the U.S. and
Canada.
Through Ford Customer Service Division's e-Business initiatives, we are
working to manage our business in real time. By linking together our suppliers,
dealers and customers, we are able to improve the speed, accuracy
E-16
and efficiency of the service business throughout the value chain. One of the
greatest competitive advantages we can provide to our dealers is the ability to
easily obtain information such as:
- Technical information from suppliers
- Parts distribution status
- Service problem diagnosis
- Customer experience results
FINANCIAL SERVICES SECTOR
FORD MOTOR CREDIT COMPANY - NOT INCLUDED
THE HERTZ CORPORATION
Hertz and its affiliates, associates and independent licensees operate
what Hertz believes is the largest worldwide car rental business based upon
revenues. They also operate one of the largest industrial and construction
equipment rental businesses in North America based upon revenues. Hertz and its
affiliates, associates and independent licensees, do the following:
- rent and lease cars and trucks
- rent industrial and construction equipment
- sell their used cars and equipment
- provide third-party claim management services
These businesses are operated from approximately 7,000 locations throughout the
United States and in over 140 foreign countries and jurisdictions.
Below are some financial highlights for Hertz (in millions):
Years Ended December 31,
-------------------------------------
2001 2000
---------------- ----------------
Revenue $4,925 $5,087
Pre-Tax Income 3 581
Net Income 23 358
Between April 1997 and March 2001, we owned approximately 82% of the
economic interest of Hertz, with the remaining approximately 18% interest
represented by shares of Hertz common stock that were publicly traded. In March
2001, through a cash tender offer and a merger transaction, we acquired the
publicly held shares and, as a result, Hertz has become an indirect,
wholly-owned subsidiary of Ford.
GOVERNMENTAL STANDARDS
A number of governmental standards and regulations relating to safety,
corporate average fuel economy ("CAFE"), emissions control, noise control,
damageability, and theft prevention are applicable to new motor vehicles,
engines, and equipment manufactured for sale in the United States, Europe and
elsewhere. In addition, manufacturing and assembly facilities in the United
States, Europe and elsewhere are subject to stringent standards regulating air
emissions, water discharges, and the handling and disposal of hazardous
substances. Such facilities in the United States
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and Europe also are subject to comprehensive national, regional, and/or local
permit programs with respect to such matters.
Mobile Source Emissions Control -- U.S. Requirements. The Federal Clean
Air Act imposes stringent limits on the amount of regulated pollutants that
lawfully may be emitted by new motor vehicles and engines produced for sale in
the United States. Currently, most light duty vehicles sold in the United States
must comply with these standards for 10 years or 100,000 miles, whichever first
occurs. The U.S. Environmental Protection Agency ("EPA") recently has
promulgated post-2004 model year standards that are more stringent than the
default standards contained in the Clean Air Act. These new regulations will
require most light duty trucks to meet the same emissions standards as passenger
cars by the 2007 model year. The stringency of the new standards may impact our
ability to produce and offer a broad range of products with the characteristics
and functionality that customers demand. The new standards also are likely to
limit severely the use of diesel technology, which could negatively impact fuel
economy performance. The EPA also has promulgated post-2004 emission standards
for "heavy-duty" trucks (8,500-14,000 lbs. gross vehicle weight). These
standards are likely to pose technical challenges and may affect the competitive
position of full-line vehicle manufacturers such as Ford.
Pursuant to the Clean Air Act, California has received a waiver from
the EPA to establish its own unique emissions control standards. New vehicles
and engines sold in California must be certified by the California Air Resources
Board ("CARB"). CARB's emissions requirements (the "California program") for
model years 1994 through 2003 require manufacturers to meet a non-methane
organic gases fleet average requirement that is significantly more stringent
than that prescribed by the Clean Air Act for the corresponding periods of time.
In late 1998, CARB adopted stringent new vehicle emissions standards that must
be phased in beginning in the 2004 model year. These new standards treat most
light duty trucks the same as passenger cars and require both types of vehicles
to meet new stringent emissions requirements. It is also expected that these new
standards will essentially eliminate the use of diesel technology. CARB's new
standards present a difficult engineering and technological challenge, and may
impact our ability to produce and offer a broad range of products with the
characteristics and functionality that customers demand.
Since 1990, the California program has included requirements for
manufacturers to produce and deliver for sale "zero-emission vehicles" (the "ZEV
mandate"). The ZEV mandate initially required that a specified percentage of
each manufacturer's vehicles produced for sale in California, beginning at 2% in
1998 and increasing to 10% in 2003, must be zero-emission vehicles ("ZEVs"),
which produce no emissions of regulated pollutants. In 1996, CARB eliminated the
ZEV mandate for the 1998-2002 model years, but retained the 10% mandate in a
modified form beginning with the 2003 model year. Around the same time, vehicle
manufacturers voluntarily entered into agreements with CARB to conduct ZEV
demonstration programs.
In January 2001, CARB voted to approve a series of complex
modifications to the ZEV mandate. These modifications require large-volume
manufacturers such as Ford to produce "partial zero-emission vehicles" ("PZEVs")
and/or ZEVs beginning in the 2003 model year. PZEVs are vehicles certified to
California's "super-ultra-low emission vehicle" ("SULEV") tailpipe standards,
with zero evaporative emissions. Using a series of phase-in tables and credit
adjustments, the number of ZEVs required under the modified mandate will
increase substantially between 2003 and 2018. The California Office of
Administrative Law refused to approve these rules due to procedural defects, so
the modifications still have not been finalized. We anticipate that CARB will
attempt to correct the defects and finalize the rules in 2002.
The Clean Air Act permits other states that do not meet national
ambient air quality standards to adopt California's motor vehicle emission
standards no later than two years before the affected model year. New York,
Massachusetts, Vermont, and Maine adopted the California standards effective
with the 2001 model year or before. New York, Massachusetts, and Vermont have
either previously adopted, or indicated an intention to adopt, the California
ZEV mandate. Maryland and New Jersey have laws requiring the adoption of
California standards if certain triggers are met. There are problems with
transferring California standards to northeast states, including the following:
1) the driving range of ZEVs is greatly diminished in cold weather, thereby
limiting their market appeal; and 2) the northeast states have refused to adopt
the California reformulated gasoline regulations, which may impair the ability
of vehicles to meet California's in-use standards. New York and Massachusetts
are in the process of finalizing rules that give manufacturers the option of
complying with the California ZEV mandate or with an alternative program that
may make compliance more feasible in those states; it is likely that Ford will
choose the
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alternative program. It is anticipated that Vermont will adopt the latest
version of the ZEV mandate once it becomes final in California.
Battery electric vehicles are the only zero-emission vehicles currently
feasible for mass production. Despite intensive research activities, battery
technology has not made the major strides that were projected when the ZEV
mandate was originally enacted in 1990. Battery-electric vehicles remain
considerably more costly than gasoline-powered vehicles, and they have a
relatively short driving range before they must be recharged. These factors
limit the consumer appeal of battery-powered vehicles. Ford plans to comply with
the early years of the modified ZEV mandate through sales of its TH!NK brand of
electric vehicles, along with one or more PZEV models. In the longer term,
however, it is doubtful whether the market will support the number of battery
electric vehicles called for by the modified ZEV mandate. Fuel cell technology
may in the future enable production of ZEVs with widespread consumer appeal, but
commercially feasible fuel cell technology appears to be a decade or more away.
Compliance with the ZEV mandate may eventually require costly actions that would
have a substantial adverse effect on Ford's sales volume and profits. For
example, we could be required to curtail the sale of non-electric vehicles
and/or offer to sell electric vehicles well below cost. Other states may seek to
adopt CARB's ZEV mandate pursuant to the Clean Air Act, thereby increasing the
costs to Ford. Other automobile manufacturers, along with some dealers, have
filed suit in state and federal court seeking to eliminate the ZEV mandate on
various procedural and substantive grounds.
Under the Clean Air Act, the EPA and CARB can require manufacturers to
recall and repair non-conforming vehicles. The EPA, through its testing of
production vehicles, also can halt the shipment of non-conforming vehicles. Ford
may be required to recall, or may voluntarily recall, vehicles for such purposes
in the future. The costs of related repairs or inspections associated with such
recalls can be substantial.
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European Requirements. European Union ("EU") directives and related
legislation limit the amount of regulated pollutants that may be emitted by new
motor vehicles and engines sold in the EU. In 1998, the EU adopted a new
directive on emissions from passenger cars and light commercial trucks. More
stringent emissions standards applied to new car certifications beginning
January 1, 2000 and to new car registrations beginning January 1, 2001 ("Stage
III Standards"). A second level of even more stringent emission standards will
apply to new car certifications beginning January 1, 2005 and to new car
registrations beginning January 1, 2006 ("Stage IV Standards"). The comparable
light commercial truck Stage III Standards and Stage IV Standards would come
into effect one year later than the passenger car requirements. The directive
includes a framework that permits EU member states to introduce fiscal
incentives to promote early compliance with the Stage III and Stage IV
Standards. The directive also introduces on-board diagnostic requirements, more
stringent evaporative emission requirements, and in-service compliance testing
and recall provisions for emissions-related defects that occur in the first five
years or 80,000 kilometers of vehicle life (extended to 100,000 kilometers in
2005). The Stage IV Standards for diesel engines are not yet technically
feasible and may impact our ability to produce and offer a broad range of
products with the characteristics and functionality that customers demand. A
related EU directive was adopted at the same time which establishes standards
for cleaner fuels beginning in 2000 and even cleaner fuels in 2005. The EU is
setting up a program to assess the need for further changes to vehicle emission
and fuel standards after 2005.
Certain European countries are conducting in-use emissions testing to
ascertain compliance of motor vehicles with applicable emissions standards.
These actions could lead to recalls of vehicles; the future costs of related
inspection or repairs could be substantial.
Motor Vehicle Safety -- U.S. Requirements. The National Traffic and
Motor Vehicle Safety Act of 1966 (the "Safety Act") regulates motor vehicles and
motor vehicle equipment in the United States in two primary ways. First, the
Safety Act prohibits the sale in the United States of any new vehicle or
equipment that does not conform to applicable motor vehicle safety standards
established by the National Highway Traffic Safety Administration (the "Safety
Administration"). Meeting or exceeding many safety standards is costly because
the standards tend to conflict with the need to reduce vehicle weight in order
to meet emissions and fuel economy standards. Second, the Safety Act requires
that defects related to motor vehicle safety be remedied through safety recall
campaigns. There were pending before the Safety Administration approximately 32
investigations relating to alleged safety defects in Ford vehicles as of
February 28, 2002. A manufacturer also is obligated to recall vehicles if it
determines that they do not comply with a safety standard. Should Ford or the
Safety Administration determine that either a safety defect or a noncompliance
exists with respect to certain of Ford's vehicles, the costs of such recall
campaigns could be substantial.
The Transportation Recall Enhancement, Accountability, and
Documentation Act (the "TREAD Act") was signed into law in November 2000. The
TREAD Act establishes new reporting requirements for motor vehicles, motor
vehicle equipment, and tires, including reporting to the Safety Administration
information on foreign recalls and information received by the manufacturer that
may assist the agency in the identification of safety defects. The obligation of
vehicle manufacturers to provide, on a cost-free basis, a remedy for vehicles
with an identified safety defect or non-compliance issue is extended from eight
years to ten years by the new legislation. The Safety Administration is also
required to develop a new dynamic test on rollovers to be used for consumer
information. Potential civil penalties are increased from $1,000 to $5,000 per
day for certain statutory violations, with a maximum penalty of $15,000,000 for
a related series of violations. Similar penalties are included for violation of
the reporting requirements. Criminal penalties are introduced for persons who
make false statements to the government or withhold information with the intent
to mislead the government about safety defects that have caused death or serious
bodily injury. Currently, there is substantial rulemaking activity related to
several TREAD Act requirements and final rules are expected to be promulgated
throughout 2002 creating significant additional regulatory burdens for vehicle
manufacturers.
Foreign Requirements. Canada, the EU, individual member countries
within the EU, and other countries in Europe, South America and the Asia Pacific
markets also have safety standards applicable to motor vehicles and are likely
to adopt additional or more stringent standards in the future.
Motor Vehicle Fuel Economy -- U.S. Requirements. Under federal law,
vehicles must meet minimum Corporate Average Fuel Economy ("CAFE") standards set
by the Safety Administration. A manufacturer is subject to potentially
substantial civil penalties if it fails to meet the CAFE standard in any model
year, after taking into account all available credits for the preceding three
model years and expected credits for the three succeeding model years.
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The law established a passenger car CAFE standard of 27.5 mpg for 1985
and later model years, which the Safety Administration believes it has the
authority to amend to a level it determines to be the maximum feasible level.
The Safety Administration has established a 20.7 mpg CAFE standard applicable to
light trucks.
Ford expects to be able to comply with the foregoing CAFE standards, in
some cases using credits from prior or succeeding model years. In general, a
continued increase in demand for larger vehicles, coupled with a decline in
demand for small and middle-size vehicles could jeopardize our long-term ability
to maintain compliance with CAFE standards.
The CAFE standards will likely increase in the near future. Both the
House and Senate have passed separate bills directing the Safety Administration
to establish new fuel economy standards for upcoming model years. It is
anticipated that a measure similar to these bills will be enacted into law
during 2002. Even if Congress does not pass such a law, it is likely that the
Safety Administration will use its existing rulemaking authority to promulgate
increases in light truck fuel economy standards. The Safety Administration has
recently requested public comment on the advisability and feasibility of
increasing light truck standards in the 2005-2010 time frame.
Pressure to increase CAFE standards stems in part from concerns over
greenhouse gas emissions, which may affect the global climate. With respect to
greenhouse gas emissions, the Bush administration released a climate change
policy initiative in February 2002. The Bush administration plan stresses
voluntary measures and a cap-and-trade program to stem the growth of greenhouse
gas emissions. The Bush administration also has launched the Freedom Car
initiative, which supports research for fuel cell-powered vehicles. Other
nations continue to press for United States ratification of the so-called "Kyoto
Protocol," which would require the United States to reduce greenhouse gas
emissions by 7% below its 1990 levels. The Kyoto Protocol does not currently
have the support of either the Bush administration or Congress. Separately, a
petition has been filed with the EPA requesting that it regulate carbon dioxide
(CO(2), a greenhouse gas) emissions from motor vehicles under the Clean Air Act.
EPA has requested public comment on this petition but has not taken action to
date. Some states, including California, are also proposing to regulate CO(2)
emissions from motor vehicles.
If significant increases in CAFE standards for upcoming model years are
imposed, or if EPA or other agencies regulate CO(2) emissions from motor
vehicles, Ford might find it necessary to take various costly actions that could
have substantial adverse effects on its sales volume and profits. For example,
Ford might have to curtail production of larger, family-size and luxury cars and
full-size light trucks, restrict offerings of engines and popular options, and
increase market support programs for its most fuel-efficient cars and light
Foreign Requirements. The EU also is a party to the Kyoto Protocol and
has agreed to reduce greenhouse gas emissions by 8% below their 1990 levels
during the 2008-2012 period. In December 1997, the European Council of
Environment Ministers (the "Environment Council") reaffirmed its goal to reduce
average CO2 emissions from new cars to 120 grams per kilometer by 2010 (at the
latest) and invited European motor vehicle manufacturers to negotiate further
with the European Commission on a satisfactory voluntary environmental agreement
to help achieve this goal. In October 1998, the EU agreed to support an
environmental agreement with the European Automotive Manufacturers Association
(of which Ford is a member) on CO2 emission reductions from new passenger cars
(the "Agreement"). The Agreement establishes an emission target of 140 grams of
CO2 per kilometer for the average of new cars sold in the EU by the
Association's members in 2008. In addition, the Agreement provides that certain
Association members (including Ford) will introduce models emitting no more than
120 grams of CO2 per kilometer in 2000, and establishes an estimated target
range of 165-170 grams of CO2 per kilometer for the average of new cars sold in
2003. Also in 2003, the Association will review the potential for additional CO2
reductions, with a view to moving further toward the EU's objective. The
Agreement assumes (among other things) that no negative measures will be
implemented against diesel-fueled cars and the full availability of improved
fuels with low sulfur content in 2005. Average CO2 emissions of 140 grams per
kilometer for new passenger cars corresponds to a 25% reduction in average CO2
emissions compared to 1995.
E-21
The Environment Council requested the European Commission to review in
2003 the EU's progress toward reaching the 120 gram target by 2010, and to
implement annual monitoring of the average CO2 emissions from new passenger cars
and progress toward achievement of the objectives for 2000 and 2003.
In 1995, members of the German Automobile Manufacturers Association
(including Ford Werke AG) made a voluntary pledge to increase by 2005 the
average fuel economy of new cars sold in Germany by 25% from 1990 levels, to
make regular reports on fuel consumption, and to increase industry research and
development efforts toward this end. The German Automobile Manufacturers
Association has reported that the industry is on track to meet the pledge.
Other European countries are considering other initiatives for reducing
CO2 emissions from motor vehicles. Taken together, such proposals could have
substantial adverse effects on our sales volumes and profits in Europe.
Japan has adopted automobile fuel consumption goals that manufacturers
must attempt to achieve by the 2000 model year. The consumption levels apply
only to gasoline-powered vehicles, vary by vehicle weight, and range from 5.8
km/l to 19.2 km/l.
End-of-Life Vehicle Proposal -- The European Parliament has published a
directive imposing an obligation on motor vehicle manufacturers to take back
end-of-life vehicles with zero or negative value registered after July 1, 2002,
and to take back all other end-of-life vehicles with zero or negative value as
of January 1, 2007, with no cost to the last owner. The Directive also imposes
requirements on the proportion of the vehicle that may be disposed of in
landfills and the proportion that must be reused or recycled beginning in 2006,
and bans the use of certain substances in vehicles beginning with vehicles
registered after July 2003. Member states may apply these provisions prior to
the dates mentioned above.
Presently, there are numerous uncertainties surrounding the form and
implementation of the legislation in different member states, especially
regarding manufacturers' responsibilities and the resultant expenses that may be
incurred. Depending on the individual member states' legislation and other
circumstances, we may be required to accrue the costs represented by these
regulations in our 2002 financial statements. The directive should not, however,
result in significant cash expenditures before 2007.
Pollution Control Costs -- During the period 2002 through 2006, we
expect to spend approximately $391 million on our North American and European
facilities to comply with air and water pollution and hazardous waste control
standards, which now are in effect or are scheduled to come into effect. Of this
total, we estimate spending approximately $73 million in 2002 and $93 million in
2003.
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EMPLOYMENT DATA
The average number of people we employed by geographic area was as
follows for the years indicated:
2001 2000
---------------- ----------------
United States 165,512 164,853
Europe 135,283 132,528
Other 53,636 52,736
-------- --------
Total 354,431 350,117
======== ========
In 2001, the average number of people we employed increased
approximately one percent. The increase reflects the full year effect of
acquisitions and newly consolidated subsidiaries (Land Rover, Ford Motor Company
Southern Africa, Collision Team of America). The numbers above include
approximately 20,500 hourly employees of Ford who are assigned to Visteon
Corporation, and, pursuant to our collective bargaining agreement with the
United Automobile Workers (the "UAW"), remain Ford employees. Visteon reimburses
Ford for all costs to Ford associated with these employees. Most of our
employees work in our Automotive operations.
For further information regarding employment statistics of Ford, see
Item 6. "Selected Financial Data" later in this Report. For information
concerning employee retirement benefits, see Note 17 of our Notes to
Consolidated Financial Statements at the end of this Report.
Substantially all of the hourly employees in our Automotive operations
in the United States are represented by unions and covered by collective
bargaining agreements. Approximately 99% of these unionized hourly employees in
our Automotive segment are represented by the UAW. Approximately 2% of our
salaried employees are represented by unions. Most hourly employees and many
non-management salaried employees of our subsidiaries outside the United States
also are represented by unions.
We have entered into a collective bargaining agreement with the UAW
that will expire on September 14, 2003. We also have entered into a collective
bargaining agreement with the Canadian Automobile Workers ("CAW") that will
expire on September 17, 2002. Among other things, our agreements with the UAW
and CAW provide for guaranteed wage and benefit levels throughout their terms
and provide for significant employment security. As a practical matter, these
agreements restrict our ability to eliminate product lines, close plants, and
divest businesses. These agreements can also limit our ability to change local
work rules and practices. Our Revitalization Plan assumes full compliance with
our obligations under existing collective bargaining agreements. Negotiation of
new collective bargaining agreements with the UAW and CAW could result in our
incurring costs different than currently anticipated.
We are or will be negotiating new collective bargaining agreements with
labor unions in Europe (as well as Mexico and Asia Pacific) where current
agreements will expire in 2002. A protracted work stoppage in Europe could
substantially adversely affect Ford's profits.
In recent years we have not had significant work stoppages at our
facilities, but they have occurred in some of our suppliers' facilities. A work
stoppage could occur as a result of disputes under our collective bargaining
agreements with labor unions or in connection with negotiations of new
collective bargaining agreements, which, if protracted, could substantially
adversely affect our business and results of operation. Work stoppages at
supplier facilities for labor or other reasons could have similar consequences
if alternate sources of components are not readily available. Our Canadian
facilities, which are covered by the CAW agreement expiring in September 2002,
include facilities that are the primary source of engines for many of our truck
and sport utility models, which are among our most profitable models. Therefore,
any protracted work stoppage at our Canadian facilities in connection with the
negotiation of a new collective bargaining agreement with the CAW will have a
substantial adverse effect on our business.
In addition to our collective bargaining agreement with the UAW, we
entered into a separate agreement with the UAW in connection with the sale of
our Dearborn steel-making operations to Rouge Industries, Inc., then known as
Marico Acquisition Corp., in 1989. As part of the sale, employees of our former
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steel-making operations became employees of Rouge Steel Company, a wholly owned
subsidiary of Rouge Industries, Inc. ("Rouge"). Pursuant to the UAW agreement,
we agreed that Rouge hourly employees who, at the time of the sale, were
represented by the UAW and met certain seniority requirements would be allowed
to return to Ford to work in one of our Rouge area plants if they were laid off
by Rouge in the future as a result of a layoff of unknown duration, a permanent
discontinuance of operations by Rouge or a sale of the assets of Rouge. The
right to return remains in effect with respect to each eligible employee for a
period equal to the employee's Ford seniority as of the date of the sale by
Ford. Approximately 1,000 former Ford employees currently employed by Rouge are
covered by this agreement. In part to avoid the occurrence of one or more of the
triggering events described above, we have extended subordinated credit to Rouge
totaling $90 million. In its Annual Report on Form 10-K for the year ended
December 31, 2001, Rouge stated that it has suffered recurring losses from
operations and negative cash flows that raise substantial doubt about its
ability to continue as a going concern.
ENGINEERING, RESEARCH AND DEVELOPMENT
We conduct engineering, research and development primarily to improve
the performance (including fuel efficiency), safety and customer satisfaction of
our products, and to develop new products. We also have staffs of scientists who
engage in basic research. We maintain extensive engineering, research and design
facilities for these purposes, including large centers in Dearborn, Michigan;
Dunton, England; and Merkenich, Germany. Most of our engineering research and
development relates to our Automotive operating segment.
During the last three years, we took charges to our consolidated income
for engineering, research and development we sponsored in the following amounts
(restated for prior years to exclude Visteon): $7.4 billion (2001), $6.8 billion
(2000), and $6.0 billion (1999). Any customer-sponsored research and development
activities that we conduct are not material.
ITEM 3. LEGAL PROCEEDINGS
Various legal actions, governmental investigations and proceedings and
claims are pending or may be instituted or asserted in the future against us and
our subsidiaries, including, but not limited to, those arising out of the
following: alleged defects in our products; governmental regulations covering
safety, emissions, and fuel economy; financial services; employment-related
matters; dealer, supplier, and other contractual relationships; intellectual
property rights; product warranties; environmental matters; and shareholder
matters. Some of the pending legal actions are, or purport to be, class actions.
Some of the foregoing matters involve or may involve compensatory, punitive or
antitrust or other multiplied damage claims in very large amounts, or demands
for recall campaigns, environmental remediation programs, sanctions or other
relief that, if granted, would require very large expenditures. See Item 1.
"Business-Governmental Standards". We regularly evaluate the expected outcome of
product liability litigation and other litigation matters. We have accrued
expenses for probable losses on product liability matters, in the aggregate,
based on an analysis of historical litigation payouts and trends. Expenses also
have been accrued for other litigation where losses are deemed probable. These
accruals have been reflected in our financial statements. Following is a
discussion of our significant pending legal proceedings:
Firestone Matters
Recall and National Highway Traffic Safety Administration Matters. On
August 9, 2000, Bridgestone/Firestone, Inc. ("Firestone") announced a recall of
all Firestone ATX and ATX II tires (P235/75R15) produced in North America since
1991 and Wilderness AT tires of that same size manufactured at Firestone's
Decatur, Illinois plant. Firestone estimated that about 6.5 million of the
affected tires were still in service on the
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date the recall was announced. The recall was announced following an analysis by
Ford and Firestone that identified a statistically significant incidence of
tread separation occurring in the affected tires. Most of the affected tires
were installed as original equipment on Ford Explorer sport utility vehicles.
This original recall was substantially completed by the end of the first quarter
2001.
The Safety Administration investigated the tread separation matter both
to make a root cause assessment and to determine whether Firestone's recall
should be expanded to include other Firestone tires. We actively cooperated with
the Safety Administration in their investigation. As a result of our work with
the Safety Administration with regard to its investigation of the Firestone tire
recall and our own root cause analysis, we announced on May 22, 2001 that we
would replace all remaining 15, 16, and 17-inch Firestone Wilderness AT tires
(about 13 million tires) on our vehicles. This precautionary action was based on
our analysis of data on the actual road performance of these tires, comparisons
with the performance of comparable tires by other tire makers, a review of
information developed by and received from the Safety Administration, and
extensive laboratory and vehicle testing.
As a result of its investigations, the Safety Administration on October
4, 2001 issued its determination that 3.5 million Wilderness AT tires
manufactured before May 1998, which tires were subject to our replacement
program, are defective, and said that Firestone had agreed to recall those
tires. About 2.5 million of the defective tires are estimated to have been in
service as of May 2001 (when Ford's replacement program was announced), and
consist of 15 and 16-inch Wilderness AT tires manufactured prior to May 1998 and
supplied to Ford as original equipment or sold as replacement equipment.
On February 12, 2002, the Safety Administration issued a report denying
an earlier request for an investigation into the handling and stability of the
Explorer after a tread separation. In its report, the Safety Administration
specifically analyzed and rejected each of allegations made in the request. The
Safety Administration based its denial on both a technical analysis of the
steering and handling of the Explorer as well as a review of crash data that
indicated "no significant difference in the likelihood of a crash following a
tread separation between Explorer vehicles and other compact SUVs."
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Firestone Tire Related Litigation. In the United States, the
above-described defect in certain Firestone tires, most of which were installed
as original equipment on Ford Explorers, has led to a significant number of
personal injury and class action lawsuits against Ford and Firestone. These
cases are described in detail below.
Firestone Personal Injury Actions. Plaintiffs in the personal injury
cases typically allege that their injuries were caused by defects in the tire
that caused it to lose its tread and/or by defects in the Explorer that caused
the vehicle to roll over. We are a defendant in these actions and, as with all
litigation facing the Company, are investigating the circumstances surrounding
the accidents and preparing to defend our product in the event we are unable to
reach reasonable resolution.
Firestone Class Actions. Five purported class actions are pending in
which plaintiffs seek to represent persons who own (or at one time owned) Ford
Explorers with Firestone tires: one in federal court in Indianapolis and four in
state courts in Pennsylvania, Wisconsin, South Carolina and Illinois. (A total
of about 96 Firestone-related class actions were originally filed, but almost
all of these have been consolidated into the one case now pending in federal
court in Indianapolis.) These actions were brought on behalf of persons who have
never been injured in an accident involving Firestone tires. They seek to expand
the scope of the recall to include other tires, the cost of replacing those
tires, the alleged diminution in vehicle value caused by the use of those tires
or by the alleged instability of Explorers, or the amount by which Ford was
"unjustly enriched" through inflated wholesale prices. They also seek punitive
damages.
In the federal case, our motion to dismiss that complaint was granted
in part and denied in part. The court ruled that, under the National Highway
Traffic Safety Act, the Safety Administration has the exclusive authority to
order and supervise automotive recalls. Accordingly, the court dismissed those
portions of the class action complaints that sought recall of additional tires
or court supervision of the recall and the tire replacement program. The court
also dismissed some of the claims for damages. However, the court refused to
dismiss the plaintiffs' warranty and unjust enrichment claims.
On November 28, 2001, the federal court certified a class consisting of
"[a]ll current residents of the United States who either (a) owned or leased a
1991 through 2001 model year Ford Explorer as of August 9, 2000 . . . or (b)
owned or leased a 1991 through 2001 model year Ford Explorer prior to August 9,
2000 . . ." The court also certified a class consisting of "[a]ll current
residents of the United States who owned or leased at any time from 1990 to the
present, vehicles that are or were equipped with Firestone ATX, ATX II, Firehawk
ATX, ATX 23 Degree, Widetrack Radial Baja, and Wilderness tires; all tires that
are the same as Firestone ATX, ATX II, Firehawk ATX, ATX 23 Degree, Widetrack
Radial Baja, and Wilderness tires but sold by Firestone under other brand names;
and all other tires manufactured by Firestone that are the same or are
substantially similar to Firestone ATX, ATX II, Firehawk ATX, ATX 23 Degree,
Widetrack Radial Baja and Wilderness tires." The United States Court of Appeals
for the Seventh Circuit has granted our petition to review this ruling.
The state trial court in South Carolina has certified a class of all
owners of Wilderness AT or ATX tires installed on Ford Explorers, but our motion
to dismiss that case is still pending.
Firestone Shareholder Derivative Actions. Two shareholder derivative
actions are pending against the Board of Directors with the Company named as a
nominal defendant. Both actions are in Michigan, one in state court and one in
federal court. The actions allege that the Board members breached their
fiduciary duties to the Company and shareholders by failing to inform themselves
adequately regarding Firestone tires, failing to insure that the Explorer design
was safe, failing to report problems with Firestone tires and to stop using
Firestone tires as original equipment, failing to recall all affected tires on a
global basis as soon as problems were known, and mismanaging the recall once it
was announced. The actions also allege breach of fiduciary duties by the Board
with respect to the use of distributor-mounted thick film ignition ("TFI")
modules. The plaintiffs seek injunctive relief and damages, a return of all
Director compensation during the period of the alleged breaches and attorneys
fees. By agreement of the parties the state court action has been
administratively stayed pending the outcome of the federal court action. In the
federal court action, Ford has filed a motion to dismiss.
Firestone Securities Class Actions. One purported nationwide class
action against the Company was filed in federal court in Detroit alleging
securities fraud and violations of Rule 10b-5 on behalf of all persons who
purchased Ford stock during the period from March 1998 through August 2000.
(Seven separate class action
E-26
complaints were filed initially, but all seven complaints have now been replaced
by one master complaint.) The plaintiffs allege that, during that period of
time, the defendants made misrepresentations about the safety of Ford products
and the Explorer in particular, and failed to disclose material facts about
problems with Firestone tires and the safety of Explorers equipped with
Firestone tires. The plaintiffs claim that, as a result of these
misrepresentations or omissions, they purchased Ford stock at inflated prices
and were damaged when the price of the stock fell upon announcement of the
recall and subsequent revelations. On December 10, 2001 the federal district
court granted Ford's motion to dismiss and dismissed the consolidated action
with prejudice. Plaintiffs have moved to amend the judgment to make the
dismissal without prejudice and for leave to file an amended complaint.
Venezuelan Matters. In Venezuela, the Attorney General's Office
continues to investigate whether criminal charges should be filed against
Firestone and Ford employees as a result of tire tread separation accidents that
occurred in that country. The Venezuelan consumer protection agency (INDECU) is
assisting in this investigation. In a separate investigation being conducted by
the Venezuelan National Assembly concerning the cause of the accidents, a
preliminary report was filed on December 5, 2001 by the Technical Commission
appointed to conduct the investigation. The report did not contain any
conclusions regarding the cause of the accidents; it only detailed the work
performed by the committee up to that date. It is not clear whether the
committee will submit a final report.
Other Product Liability Matters
Asbestos Matters. Along with other vehicle manufacturers, we have been
the target of asbestos litigation. We are a defendant in various actions for
injuries claimed to have resulted from alleged contact with certain Ford parts
and other products containing asbestos. Asbestos was used in brakes, clutches
and other auto components from 1927-1997. We no longer use asbestos in our
vehicles.
Most of the asbestos litigation we face involves mechanics that worked
with brakes over the years, although we have some cases that relate to the
presence of asbestos in our facilities. In most of these cases we are not the
sole defendant. We believe we are becoming more aggressively targeted in these
suits as a result of the bankruptcy filings of companies that have been the
previous targets of asbestos litigation. As with all litigation facing the
Company, we are prepared to defend these asbestos related cases. We believe that
the scientific evidence confirms our long-standing position that mechanics are
not at an increased risk of asbestos related disease as a result of exposure to
asbestos used in the Company's vehicles.
The majority of these cases do not specify a dollar amount for damages
claimed and in many of those cases that do specify a dollar amount, the specific
amount referred to is only the jurisdictional minimum. In any event, the actual
damages paid out to claimants pursuant to adverse judgments or settlements have
historically been only a small fraction of the damages claimed. To date, our
annual payout on these cases has not been material. However, trends toward
larger jury verdicts and increased awards of punitive damages create the risk
that the amounts actually paid to asbestos claimants may increase in the future.
E-27
Environmental Matters
General. We have received notices under various federal and state
environmental laws that we (along with others) may be a potentially responsible
party for the costs associated with remediating numerous hazardous substance
storage, recycling or disposal sites in many states and, in some instances, for
natural resource damages. We also may have been a generator of hazardous
substances at a number of other sites. The amount of any such costs or damages
for which we may be held responsible could be substantial. The contingent losses
that we expect to incur in connection with many of these sites have been accrued
and those losses are reflected in our financial statements in accordance with
generally accepted accounting principles. However, for many sites, the
remediation costs and other damages for which we ultimately may be responsible
are not reasonably estimable because of uncertainties with respect to factors
such as our connection to the site or to materials there, the involvement of
other potentially responsible parties, the application of laws and other
standards or regulations, site conditions, and the nature and scope of
investigations, studies, and remediation to be undertaken (including the
technologies to be required and the extent, duration, and success of
remediation). As a result, we are unable to determine or reasonably estimate the
amount of costs or other damages for which we are potentially responsible in
connection with these sites, although that total could be substantial.
Waste Disposal. The EPA initiated a civil enforcement action against
Ford as a result of Ford Venezuela's 1997 shipment of industrial wastes from its
Valencia Assembly Plant in Venezuela for disposal in Texas. Ford Venezuela
shipped the industrial waste to the U.S. for disposal under the more stringent
U.S. disposal requirements because of the unavailability of adequate disposal
facilities in Venezuela and to ensure proper disposal of the waste. Although
Ford believes that the subject waste is properly classified as non-hazardous
under U.S. environmental laws, the EPA contends that even if the wastes do not
exhibit any hazardous characteristics, they nevertheless may be the product of a
process that is automatically deemed hazardous under applicable regulations. If
Ford is determined to have violated EPA regulations regarding the disposal of
hazardous wastes, Ford could be required to pay fines which could exceed
$100,000.
Ohio Assembly Plant. In September 1999, the EPA filed an administrative
complaint against Ford alleging violations of the Resource Conservation and
Recovery Act ("RCRA") at Ford's Ohio Assembly Plant. The alleged violations are
related to Ford's storage of hazardous waste and the absence of a leak
monitoring program for paint equipment. The count alleging failure to implement
a leak monitoring program for paint equipment remains subject to discussion
between Ford and EPA. Subsequent to the Ohio Assembly enforcement action, Ford
has received notices of violation alleging the same noncompliance at other
facilities. If Ford is determined to have violated EPA regulations, Ford could
be required to pay fines or take other actions, the aggregate cost of which
could exceed $100,000.
Sale of E-450s in California. CARB has opened an investigation with
respect to approximately 375 1998 and 1999 model year E-450 vehicles sold to
California customers. CARB alleges that these vehicles were sold without the
required California emissions certification. CARB alleges that the sales were
due, in part, to an error in Ford's ordering process for the E-450. If Ford is
determined to have violated CARB regulations, Ford could be required to pay
fines that could exceed $100,000. Discussions between CARB and Ford are ongoing.
Class Actions
Paint Class Actions. There are two purported class actions pending
against Ford in Texas and Illinois alleging claims for fraud, breach of
warranty, and violations of consumer protection statutes. The Texas case
purports to assert claims on behalf of Texas residents who have experienced
paint peeling in certain 1984 through 1992 model year Ford vehicles. The
Illinois case purports to assert claims on behalf of residents of all states
except Louisiana and Texas who have experienced paint peeling on most 1988
through 1997 model year Ford vehicles. Plaintiffs in both cases contend that
their paint is defective and susceptible to peeling because Ford did not use
spray primer between the high-build electrocoat ("HBEC") and the color coat. The
lack of spray primer allegedly causes the adhesion of the color coat to the HBEC
to deteriorate after extended exposure to ultraviolet radiation from sunlight.
Plaintiffs in both cases seek unspecified compensatory damages (in an amount to
cover the cost of repainting their vehicles and to compensate for alleged
diminution in value), punitive damages, attorneys' fees and interest.
E-28
The Illinois case, Phillips, is still in the early stages of litigation
and there have been no significant developments in that case. In the Texas case,
Sheldon, the trial court certified a class of Texas owners who experienced paint
peeling because of the alleged defect. On May 11, 2000, the Texas Supreme Court
reversed the trial court, decertified the class and remanded the case for
further proceedings. On remand, the trial court certified two classes consisting
of original owners of class vehicles who experienced peeling paint and original
owners who paid Ford or a Ford dealer to repaint their vehicles. We have filed
an appeal with the Texas Court of Appeals.
TFI Module Class Actions. There are seven class actions pending in
state courts in Alabama, California, Illinois, Maryland, Missouri, Tennessee and
Washington, alleging defects in TFI modules in more than 22 million vehicles
manufactured by Ford between 1983 and 1995. With minor variations based upon
state law and differences in the scope of the classes alleged, all of the cases
involve the same legal claims and theories. The parties have reached an
agreement to settle the lead case in California and five of the other pending
cases. The agreement provides that Ford will extend the warranties applicable to
distributor-mounted TFI modules to 100,000 miles, reimburse class members who
previously paid to replace Motorcraft(R) distributor-mounted TFI modules, donate
$5 million to an organization for research and education in the fields of
automotive safety or environmental protection, and pay plaintiffs' counsel
reasonable fees and expenses. The court in the California case gave preliminary
approval to the settlement. A final hearing on the settlement has been scheduled
for June 21, 2002. If the settlement is approved by the California court, the
remaining five cases expressly subject to the settlement will be dismissed. A
class certification motion is pending in the seventh case (in Illinois), but if
the nationwide settlement is approved by the California court we expect that
case to be dismissed as well.
Ford/Citibank Visa Class Action. Following the June 1997 announcement
of the termination of the Ford/Citibank credit card rebate program, five
purported nationwide class actions and one purported statewide class action were
filed against Ford; Citibank is also a defendant in some of these actions. The
actions allege damages in an amount up to $3,500 for each cardholder who
obtained a Ford/Citibank credit card in reliance on the rebate program and who
is precluded from accumulating discounts toward the purchase or lease of new
Ford vehicles after December 1997 as a result of the termination of the rebate
program. Plaintiffs contend that defendants deceptively breached their contract
by unilaterally terminating the program, that defendants have been unjustly
enriched as a result of the interest charges and fees collected from
cardholders, and further, that defendants conspired to deprive plaintiffs of the
benefits of their credit card agreement. Plaintiffs seek compensatory damages,
or alternatively, reinstatement of the rebate program, and punitive damages,
costs, expenses and attorneys' fees. The five purported nationwide class actions
were filed in state courts in Alabama, Illinois, New York, Oregon and
Washington, and the purported statewide class action was filed in a California
state court. The Alabama court has conditionally certified a class consisting of
Alabama residents. Ford removed all of the cases to federal court, which
consolidated and transferred the cases to federal court in Washington for
pretrial proceedings. In October 1999, the federal court dismissed the
consolidated proceedings for lack of jurisdiction and sent each action back to
the state court in which it originated. We appealed this ruling to the United
States Court of Appeals for the Ninth Circuit, which affirmed the trial court.
The United States Supreme Court has granted Ford's petition for a writ of
certiorari and will review the decision of the Ninth Circuit. We do not expect a
decision from the Court until at least the fourth quarter.
Lease Residual Class Action -- not included.
Retail Lessee Insurance Coverage Class Action. On May 24, 1999,
Michigan Mutual Insurance Company was served with a purported class action
complaint in federal court in Florida alleging that the Ford Commercial, General
Liability and Business Automobile Insurance Policy, and the Personal Auto
Supplement to that policy, provides uninsured/underinsured motorist coverage and
medical payments coverage to retail lessees of Ford vehicles (e.g., to Red
Carpet lessees). The Company is required to defend and indemnify Michigan
Mutual. The complaint rests on an untenable interpretation of the Michigan
Mutual policy, which was intended to cover company cars and lease evaluation
vehicles. Unfortunately, however, the Florida Court of Appeals in a prior action
brought by a single individual, has accepted plaintiffs' interpretation of the
policy. The Florida court's opinion should not be controlling in federal court,
however, and Ford has filed a motion for summary judgment based on the policy
language and the intention of the parties. Plaintiffs responded to Ford's
motion, cross-moved for summary judgment in their favor, moved to amend their
complaint, and moved for class certification. A hearing on Ford's motion was
held on October 2, 2000, and we expect a decision sometime in 2002.
E-29
Throttle Body Assemblies Class Action. A purported nationwide class
action is pending in federal court in Ohio on behalf of all persons who own or
lease 1999 Mercury Villagers. The complaint alleges that the vehicle has a
defective throttle body assembly that causes the gas pedal to intermittently
lock or stick in the closed position. The complaint alleges breach of warranty,
negligence, and violation of consumer protection statutes. Plaintiffs seek an
order requiring Ford to recall the vehicles. They also seek unspecified
compensatory damages, treble damages, attorneys fees, and costs. Plaintiffs'
motion to certify a class is pending.
Windstar Transmission Class Actions. Two purported class actions are
pending, alleging that Ford marketed, advertised, sold, and leased 1995
Windstars in a deceptive manner by misrepresenting their quality and safety and
actively concealing defects in the transmissions. One case is pending in
California state court and is limited to owners and lessees of that state.
Another case is pending in Illinois state court and purports to represent owners
and lessees from all states. Plaintiffs contend that transmissions in the
Windstar have prematurely suffered from shifting problems and acceleration
failures, requiring early replacement at substantial expense to owners. The
cases assert several statutory and common law theories, and seek several types
of relief, including unspecified compensatory damages, punitive damages, and
injunctive relief. Plaintiffs' have filed a motion for class certification in
the California case. (A third case, which alleged a defect in the transmissions
of 3.8 liter engines in 1990-95 Taurus/Sables and 1990-94 Lincoln Continentals
in addition to 1995 Windstars has been dismissed. Plaintiffs have appealed the
dismissal to the United States Court of Appeals for the Third Circuit.)
Seat Back Class Actions. Four purported statewide class actions were
filed in state courts in Maryland, New Hampshire, New Jersey and New York
against Ford, General Motors Corporation and DaimlerChrysler AG alleging that
seat backs with single recliner mechanisms are defective. Plaintiffs in each of
these suits alleged that seats installed in class vehicles (defined as almost
all passenger cars made after 1991) are defective because the seat backs are
unstable and susceptible to rearward collapse in the event of a rear-end
collision. The purported class in each state consists of all persons who own a
class vehicle and specifically excludes all persons who have suffered personal
injury as a result of the rearward collapse of a seat. Plaintiffs allege causes
of action for negligence, strict liability, implied warranty, fraud, and civil
conspiracy. Plaintiffs also allege violations of the consumer protection
statutes in the various states. Plaintiffs seek "compensatory damages measured
by the cost of correcting the defect, not to exceed $5,000 for each class
vehicle." Ford's motions to dismiss were granted in Maryland, New Hampshire, and
New York, and Ford's motion for summary judgment was granted in New Jersey. The
New Hampshire Supreme Court affirmed the trial court's ruling, but plaintiffs'
appeals are pending in New York, Maryland, and New Jersey.
Late Charges Class Actions -- not included.
Fair Lending Class Actions -- not included.
F-150 Radiator Class Actions. Two purported class actions are pending
alleging that the Company defrauded purchasers of 1999-2001 F-150 trucks by
falsely representing that certain option packages included "upgraded" radiators.
Approximately 400,000 trucks that were intended to have larger radiators were
built with standard radiators. The first case, filed in state court in New York,
purports to represent a nationwide class, and seeks an order requiring
installation of larger radiators and other damages. The trial court granted our
motion to dismiss, and plaintiffs have appealed. In the second case, filed in
state court in Texas, the trial court has certified a class of all purchasers of
2000 and 2001 F-150 trucks with heavy duty or trailer packages in Texas, and
seeks unspecified damages. We are appealing that ruling to the Texas Court of
Appeals. Plaintiffs' motion to modify the certification ruling to expand it to a
nationwide class is pending in the trial court.
E-30
Platinum Group Metals A purported nationwide class action has been
filed against the Company in federal court in New York alleging securities fraud
and violations of Rule 10b-5 on behalf of all persons who purchased Ford stock
between December 1, 1999 and January 12, 2002 (the "class period"). The
plaintiff alleges that during the class period the Company entered into a series
of contracts for the purchase of platinum group metals ("PGM") at historically
high prices and failed to properly hedge these purchases, thereby exposing the
Company to losses when the price of PGM fell. The plaintiffs allege that the
Company made statements in its securities disclosures about its commodity
purchase practices and hedging programs that misled investors as to Ford's
exposure to loss from PGM purchases. As a result, plaintiffs allege that they
purchased Ford stock at inflated prices and were damaged when Ford "wrote-down"
the value of its PGM by $1 billion on a pre-tax basis.
Side Release Seat Belt Buckles. On February 14, 2002, Ford was served
with a purported class action alleging that the side release buckles installed
in 1969 through 1998 Ford vehicles are defective because they "could unlatch
from inertial forces." The suit was filed in state court in Illinois against
General Motors Corporation as well as against Ford, allegedly on behalf of all
Illinois owners of vehicles with the defective buckles. The complaint seeks
compensatory and punitive damages, including a payment to each class member of
the cost of installing different buckles.
Other Matters
Rouge Powerhouse Insurance Litigation. There are several pending
lawsuits arising out of the February 1, 1999 Rouge Powerhouse explosion. In June
2000, Ford filed a coverage action against ten property insurance carriers
seeking property damage and business interruption losses attributable to the
Powerhouse explosion. Factory Mutual, one of these insurers, filed a
counterclaim in the lawsuit for claims paid to Rouge Steel Company ("Rouge
Steel"). Factory Mutual's counterclaim alleges that Rouge Steel's damages
occurred as a result of Ford's negligence, gross negligence or willful and
wanton misconduct in operating the Powerhouse and totals approximately $340
million. This counterclaim, and a similar claim for approximately $25 million by
other insurers of Rouge Steel, has been ordered to arbitration. Additionally,
claims related to business interruption losses incurred by several suppliers to
Rouge Steel, totaling approximately $20 million, also have been added to the
arbitration. In addition, seventeen Ford employees and two Rouge Steel employees
also have filed lawsuits seeking recovery in excess of $100 million in the
aggregate for alleged psychological injuries caused as a result of the
explosion.
Visteon Dispute. As reported in the media, Ford and Visteon Corporation, our
former automotive components subsidiary that was spun-off on June 28, 2000, have
been attempting to resolve certain disputes that arose out of the spin-off
related to the pricing of components sold by Visteon to Ford. The primary
disputes related to (i) the amount of Ford's contractual entitlement to
productivity price reductions for the year 2001, and (ii) Ford's ability to
adjust downward the price of business sourced to Visteon in Europe at the time
of the spin-off over the years 2001-2005. We have negotiated a resolution of the
first matter in respect of North America, and Visteon is pursuing arbitration of
the second matter.
E-31
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected financial data and other data
concerning Ford for each of the last five years (dollar amounts in millions,
except per share amounts). 1997-1999 data (except employee data) have been
restated to reflect Visteon as a discontinued operation.
SUMMARY OF OPERATIONS
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
AUTOMOTIVE SECTOR
Sales $ 131,528 $ 141,230 $ 135,073 $ 118,017 $ 121,976
Operating income/(loss) (7,568) 5,232 7,169 5,376 6,060
Income/(loss) before income taxes (9,036) 5,267 7,275 5,842 6,267
Net income/(loss) (6,267) 3,624 4,986 4,049 4,203
FINANCIAL SERVICES SECTOR
Revenues $ 30,884 $ 28,828 $ 25,630 $ 25,524 $ 30,796
Income before income taxes 1,452 2,967 2,579 18,438 3,857
Net income (a), (b) 814 1,786 1,516 17,319 2,206
TOTAL COMPANY
Income/(loss) before income taxes $ (7,584) $ 8,234 $ 9,854 $ 24,280 $ 10,124
Provision/(credit) for income taxes (2,151) 2,705 3,248 2,760 3,436
Minority interests in net income of subsidiaries 20 119 104 152 279
--------- --------- --------- --------- ---------
Income/(loss) from continuing operations
(a), (b) (5,453) 5,410 6,502 21,368 6,409
Income from discontinued operation - 309 735 703 511
Loss on spin-off of discontinued operation - (2,252) - - -
--------- --------- --------- --------- ---------
Net income/(loss) $ (5,453) $ 3,467 $ 7,237 $ 22,071 $ 6,920
========= ========= ========= ========= =========
TOTAL COMPANY DATA PER SHARE OF COMMON
AND CLASS B STOCK (c)
BASIC:
Income/(loss) from continuing operations $ (3.02) $ 3.66 $ 5.38 $ 17.59 $ 5.32
Income/(loss) before cumulative effects
of changes in accounting principles (3.02) 2.34 5.99 18.17 5.75
Net income/(loss) (3.02) 2.34 5.99 18.17 5.75
DILUTED:
Income/(loss) from continuing operations $ (3.02) $ 3.59 $ 5.26 $ 17.19 $ 5.20
Income/(loss) before cumulative effects
of changes in accounting principles (3.02) 2.30 5.86 17.76 5.62
Net income/(loss) (3.02) 2.30 5.86 17.76 5.62
Cash dividends (d) $ 1.05 $ 1.80 $ 1.88 $ 1.72 $ 1.645
Common stock price range (NYSE Composite)
High 31.42 31.46 37.30 33.76 18.34
Low 14.70 21.69 25.42 15.64 10.95
Average number of shares of Common and
Class B stock outstanding (in millions) 1,820 1,483 1,210 1,211 1,195
- --------------
(a) 1998 includes a non-cash gain of $15,955 million that resulted from Ford's
spin-off of The Associates.
(b) 1997 includes a gain of $269 million on the sale of Hertz Common Stock.
(c) Share data have been adjusted to reflect stock dividends and stock splits.
Common stock price range (NYSE Composite) has been adjusted to reflect the
Visteon spin-off, a recapitalization known as our Value Enhancement Plan,
and The Associates Spin-off.
(d) Adjusted for the Value Enhancement Plan effected in August 2000, cash
dividends were $1.16 per share in 2000.
E-32
SUMMARY OF OPERATIONS
(CONTINUED)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
TOTAL COMPANY BALANCE
SHEET DATA AT YEAR-END
ASSETS
Automotive sector $ 88,319 $ 94,312 $ 99,201 $ 83,911 $ 80,339
Financial Services sector 188,224 189,078 171,048 148,801 194,018
-------- -------- -------- -------- --------
Total assets $276,543 $283,390 $270,249 $232,712 $274,357
======== ======== ======== ======== ========
LONG-TERM DEBT
Automotive $ 13,492 $ 11,769 $ 10,398 $ 8,589 $ 6,964
Financial Services 107,266 87,118 67,517 55,468 73,198
Stockholders' equity 7,786 18,610 27,604 23,434 30,787
TOTAL COMPANY FACILITY
AND TOOLING DATA
Capital expenditures for
facilities (excluding
special tools) $ 4,671 $ 5,315 $ 4,332 $ 4,369 $ 4,906
Depreciation 15,864 12,915 11,846 10,890 9,865
Expenditures for special tools 2,337 3,033 3,327 3,388 2,894
Amortization of special tools 3,265 2,451 2,459 2,880 3,126
TOTAL COMPANY EMPLOYEE
DATA - WORLDWIDE
Payroll $ 17,433 $ 18,081 $ 18,390 $ 16,757 $ 17,187
Total labor costs 23,553 25,783 26,881 25,606 25,546
Average number of employees 354,431 350,117 374,093 342,545 363,892
TOTAL COMPANY EMPLOYEE
DATA - U.S. OPERATIONS
Payroll $ 10,832 $ 11,274 $ 11,418 $ 10,548 $ 10,840
Average number of employees 165,512 164,853 173,045 171,269 189,787
AVERAGE HOURLY LABOR COSTS (f)
Earnings $ 27.38 $ 26.73 $ 25.58 $ 24.30 $ 22.95
Benefits 20.35 21.71 21.79 21.42 20.60
-------- -------- -------- -------- --------
Total hourly labor costs $ 47.73 $ 48.44 $ 47.37 $ 45.72 $ 43.55
======== ======== ======== ======== ========
- --------------
(f) Per hour worked (in dollars). Excludes data for subsidiary companies.
E-33
SUMMARY OF VEHICLE UNIT SALES (a)
(IN THOUSANDS) 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
NORTH AMERICA
United States
Cars 1,427 1,775 1,725 1,563 1,614
Trucks 2,458 2,711 2,660 2,425 2,402
----- ----- ----- ----- -----
Total United States 3,885 4,486 4,385 3,988 4,016
Canada 245 300 288 279 319
Mexico 162 147 114 103 97
----- ----- ----- ----- -----
Total North America 4,292 4,933 4,787 4,370 4,432
EUROPE
Britain 637 476 518 498 466
Germany 383 320 353 444 460
Italy 249 222 209 205 248
Spain 178 180 180 155 155
France 163 158 172 171 153
Other countries 551 526 528 377 318
----- ----- ----- ----- -----
Total Europe 2,161 1,882 1,960 1,850 1,800
OTHER INTERNATIONAL
Brazil 125 134 117 178 214
Australia 115 125 125 133 132
Taiwan 53 63 56 77 79
Argentina 29 49 60 97 147
Japan 18 26 32 25 40
Other countries 198 212 83 93 103
----- ----- ----- ----- -----
Total other international 538 609 473 603 715
TOTAL WORLDWIDE VEHICLE
----- ----- ----- ----- -----
UNIT SALES 6,991 7,424 7,220 6,823 6,947
===== ===== ===== ===== =====
- ------------------
(a) Vehicle unit sales generally are reported worldwide on a "where sold" basis
and include sales of all Ford Motor Company-badged units, as well as units
manufactured by Ford and sold to other manufacturers.
E-34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FOURTH QUARTER 2001 RESULTS OF OPERATIONS
Our worldwide losses, including charges of $4,106 million primarily
related to our Revitalization Plan, were $5,068 million in the fourth quarter of
2001, or $2.81 per diluted share of Common and Class B Stock. In the fourth
quarter of 2000, earnings were $1,077 million (including charges for unusual
items of $133 million), or $0.57 per diluted share. Worldwide sales and revenues
were $41.2 billion in the fourth quarter of 2001, down $1.4 billion, reflecting
primarily lower vehicle sales in North America, partially offset by higher
vehicle sales in Europe. Unit sales of cars and trucks were 1,808,000 units,
down 32,000 units, reflecting primarily lower market share in the United States,
partially offset by higher market share in Europe.
Results of our operations by business sector for the fourth quarter of
2001 and 2000 are shown below (in millions):
Fourth Quarter Net Income/(Loss)
---------------------------------------
2001
Over/(Under)
2001 2000 2000
--------- ----------- --------------
Automotive sector $(4,708) $ 629 $(5,337)
Financial Services sector (360) 448 (808)
------- ------ -------
Total Company net income/(loss) $(5,068) $1,077 $(6,145)
======= ====== =======
Following an extensive review of Ford's North and South American
operations, on January 11, 2002, we announced the operating and financial goals
of our Revitalization Plan, which we expect to achieve by mid-decade. The
pre-tax impact of the Revitalization Plan and other fourth quarter charges
include (in billions):
Fixed-asset impairments
North America $3.1
South America 0.7
----
Total fixed-asset impairments 3.8
Precious metals 1.0
Personnel (primarily North America salaried) 0.6
All other 0.3
----
Total pre-tax charges $5.7
====
Memo: After-tax effect of charges $4.1
These substantially non-cash charges included $3.9 billion and $204
million for the Automotive sector and the Financial Services sector,
respectively. The Automotive-related charge included asset impairment charges,
write-down of precious metals and forward contracts related thereto, employee
separation costs (primarily for employees who voluntarily accepted separation
offers in 2001) and other charges, such as an accounting charge for Mazda
pension expense and the impact of the devaluation of the Argentine peso. See
Note 16 of the Notes to our Consolidated Financial Statements for more
information regarding these charges.
We expect that the effects of our Revitalization Plan will improve our
pre-tax operating results to $7 billion annually, an improvement of $9 billion,
by mid-decade. This expectation is based on assumptions for the U.S. market for
2003 and beyond with respect to industry sales (16 million units annually),
Ford-brand market share (19%) and net pricing (negative).
E-35
Automotive Sector
Worldwide losses for our Automotive sector were $4,708 million in the
fourth quarter of 2001 on sales of $33.8 billion. Earnings in the fourth quarter
of 2000 were $629 million on sales of $35.1 billion.
Details of our Automotive sector earnings for the fourth quarter of
2001 and 2000 are shown below (in millions):
Fourth Quarter
Net Income/(Loss)
---------------------------------------
2001
Over/(Under)
2001 2000 2000
---------------------------------------
North American Automotive $(4,068) $ 607 $(4,675)
Automotive Outside North America
- Europe 61 33 28
- South America (598) (31) (567)
- Rest of World (103) 20 (123)
------- ------ -------
Total Automotive Outside
North America (640) 22 (662)
------- ------ -------
Total Automotive sector $(4,708) $ 629 $(5,337)
======= ====== =======
The decrease in our fourth quarter Automotive sector earnings in North
America reflected primarily the asset impairments and other charges outlined
above, lower vehicle unit sales volumes, significantly increased marketing costs
for Ford, Lincoln and Mercury brands (16.7% of sales compared with 10.7% a year
ago), and an increase in warranty and other costs associated with customer
satisfaction initiatives.
The improved fourth quarter results in Europe reflected an increase in
vehicle unit sales and the benefits of last year's restructuring actions. The
decline in South America reflected primarily asset impairments related to the
Revitalization Plan and other charges, lower operating results due to a weaker
currency in Brazil, the devaluation of the Argentine peso and lower industry
volumes in Brazil and Argentina.
Financial Services Sector
Details of our Financial Services sector earnings are shown below (in
millions):
Fourth Quarter
Net Income/(Loss)
--------------------------------------
2001
Over/(Under)
2001 2000 2000
----------- ----------- --------------
Ford Credit $(297) $410 $(707)
Hertz (58) 56 (114)
Minority interests and other (5) (18) 13
----- ---- -----
Total Financial Services sector $(360) $448 $(808)
===== ==== =====
Ford Credit - not included.
Losses at Hertz in the fourth quarter of 2001 were $58 million,
compared with earnings of $56 million a year ago. The profit decline was
primarily due to the lower car rental volume in the United States, reflecting
the adverse impact on business travel and pricing following the terrorist
attacks of September 11, 2001 and the slowdown in the U.S. economy.
FULL-YEAR 2001 RESULTS OF OPERATIONS
E-36
Our worldwide sales and revenues were $162.4 billion in 2001, down $7.7
billion from 2000, reflecting primarily lower vehicle sales in North America,
offset partially by higher vehicle sales in Europe. We sold 6,991,000 cars and
trucks in 2001, down 433,000 units, reflecting primarily lower market share in
the United States, partially offset by higher market share in Europe.
Results of our operations by business sector for 2001, 2000, and 1999
are shown below (in millions):
Net Income/(Loss)
---------------------------------------
2001 2000 1999
------------ ----------- ------------
Automotive sector $(6,267) $ 3,624 $ 4,986
Financial Services sector 814 1,786 1,516
------- ------- -------
Income/(Loss) from continuing operations (5,453) 5,410 6,502
Income from discontinued operation* - 309 735
Loss on spin-off of discontinued operation - (2,252) -
------- ------- -------
Total Company net income/(loss) $(5,453) $ 3,467 $ 7,237
======= ======= =======
* Visteon Corporation, our former automotive components
subsidiary, was spun off to Ford Common and Class B
stockholders on June 28, 2000.
The following unusual items were included in our 2001, 2000, and 1999 income
from continuing operations (in millions):
Automotive Sector
-------------------------------------------------------------
Rest Total Financial
North South of Auto Services
America Europe America World Sector Sector
------------ ------------------------------------------------ -----------
2001
- ----
- - Derivative instruments (SFAS No. 133)
transition adjustment and ongoing effects $ (95) $ (95) $ (157)
- - Mazda restructuring actions in the second
quarter $ (114) (114)
- - Write-down of E-commerce and Automotive-
related ventures in the third quarter (199) (199)
- - Revitalization Plan and other fourth quarter
charges (includes portion of SFAS No. 133) (3,149) $(552) (201) (3,902) (204)
------- -------- ----- ------ ------- ------
Total 2001 unusual items $(3,443) - $(552) $ (315) $(4,310) $ (361)
======= ======== ===== ====== ======= ======
- ------------------------------------------------------------------------------------------------------------------------------------
2000
- ----
- - Asset impairment and restructuring costs for
Ford brand operations in Europe in the
second quarter $(1,019) $(1,019)
- - Inventory-related profit reduction for Land
Rover in the third quarter $ (13) (76) $ (17) (106)
- - Write-down of assets associated with the
Nemak joint venture in the fourth quarter (133) (133)
------- -------- ------- -------- ------- ------
Total 2000 unusual items $ (146) $(1,095) - $ (17) $(1,258) $ -
======= ======== ===== ====== ======= ======
- ------------------------------------------------------------------------------------------------------------------------------------
1999
- ----
- - Gain from the sale of our interest in
AutoEuropa to Volkswagen AG in the first
quarter $ 165 $ 165
- - Inventory-related profit reduction for Volvo
Car in the second quarter $ (16) (125) $ (5) (146)
- - Visteon-related postretirement adjustment in
the third quarter (incl. in Total Auto Sector) (125)
- - Employee separation costs in the third
quarter (79) (79) $ (23)
- - Lump-sum payments relating to ratification of
the 1999 United Auto Workers and Canadian
Auto Workers contracts in the fourth
quarter (80) (80)
------- -------- ------- -------- ------- ------
Total 1999 unusual items $ (175) $ 40 - $ (5) $ (265) $ (23)
======= ======== ===== ====== ======= ======
Excluding these unusual items, losses from continuing operations would
have been $782 million in 2001, compared with income from continuing operations
of $6,668 million in 2000 and $6,790 million in 1999.
E-37
We established and communicated the financial milestones listed below
for 2001, which excluded Visteon in both the 2000 base period and 2001. Our
results against these milestones, excluding the unusual items described above,
are listed below.
2001 Milestone Actual Result
-------------- -------------
Total Company
-------------
-- Revenue Grow $5 billion Declined $8 billion
Automotive
----------
-- North America 4%+ return on sales (2.3)%
-- Europe 1%+ return on sales 0.8%
-- South America Improve results Improved by $12 million
-- Rest of World Achieve profitability Earned $156 million
-- Total Costs Reduce $1 billion Increased $1 billion*
(at constant volume and mix)
-- Capital Spending Contain at $8 billion or less Spent $6.4 billion
Financial Services
------------------
-- Ford Credit Improve returns Declined 3.6 percentage points
Grow earnings 10% Declined 22%
- -------------------
* Excludes costs related to our Firestone tire replacement action
AUTOMOTIVE SECTOR RESULTS OF OPERATIONS
Details of our Automotive sector earnings from continuing operations
for 2001, 2000, and 1999 are shown below (in millions):
Net Income/(Loss)
------------------------------------
2001 2000 1999
------------ ----------- -----------
North American Automotive $(5,597) $ 4,886 $5,418
Automotive Outside North America
- Europe 266 (1,130) 50
- South America (777) (240) (444)
- Rest of World (159) 108 87
------- ------- ------
Total Automotive Outside
North America (670) (1,262) (307)
Visteon-related postretirement adjustment - - (125)
------- ------- ------
Total Automotive sector $(6,267) $ 3,624 $4,986
======= ======= ======
2001 Compared with 2000
Worldwide losses from continuing operations for our Automotive sector
were $6,267 million in 2001 on sales of $131.5 billion, compared with earnings
of $3,624 million in 2000 on sales of $141.2 billion. Adjusted for constant
volume and mix and excluding unusual items and costs related to our Firestone
tire replacement action, our total costs in the Automotive sector increased $1.0
billion compared with 2000.
Our Automotive sector losses from continuing operations in North
America were $5,597 million in 2001 on sales of $91.0 billion, compared with
earnings of $4,886 million in 2000 on sales of $103.9 billion. The earnings
deterioration reflected primarily lower vehicle unit sales volumes, the charges
associated with the Revitalization Plan and the other charges outlined above,
significantly increased marketing costs, costs associated with the Firestone
tire replacement action and increased warranty and other costs associated with
customer satisfaction initiatives.
E-38
In 2001, approximately 17.5 million new cars and trucks were sold in
the United States, down from 17.8 million units in 2000. Our share of those unit
sales was 22.8% in 2001, down 0.9 percentage points from a year ago, due
primarily to increased competition resulting from new model entrants into the
truck and sport utility vehicle segments, as well as the continued weakness of
the Japanese yen, which creates favorable pricing opportunities for our Japanese
competitors. Marketing costs for our Ford, Lincoln and Mercury brands increased
to 14.7% of sales of those brands, up from 11.1% a year ago, reflecting
increased competitive pricing in the form of subsidized financing and leasing
programs (such as 0.0% financing during the fourth quarter), cash rebates and
other incentive programs.
Our Automotive sector earnings in Europe were $266 million from
continuing operations in 2001, compared with losses of $1,130 million a year
ago. The increase reflected the non-recurrence of the 2000 charge related to
asset impairments and restructuring, as well as increased vehicle unit sales and
the effect on depreciation from last year's asset impairment and restructuring
actions.
In 2001, approximately 17.8 million new cars and trucks were sold in
our nineteen primary European markets, down from 17.9 million units in 2000. Our
share of those unit sales was 10.7% in 2001, up 0.7 percentage points from a
year ago, reflecting increased sales of new Ford-brand Mondeo and Transit models
and our acquisition of Land Rover.
Our Automotive sector losses in South America were $777 million from
continuing operations in 2001, compared with a loss of $240 million in 2000. The
decrease is more than explained by asset impairment charges and the devaluation
of the Argentine peso.
Industry sales in 2001 were 1.6 million units in Brazil, up about 10%
from 2000, and approximately 201,000 units in Argentina, down 41% from 2000.
Brazil's economy has recently entered into a recession as a result of tight
fiscal and monetary policies and election year uncertainties, which have
restrained growth. We expect industry volumes in Brazil to deteriorate in 2002.
Economic conditions continue to remain weak in Argentina primarily as a result
of the recent peso devaluation. Our combined car and truck market share in these
markets in 2001 was 7.8% in Brazil (down 1.3 percentage points) and 14.3% in
Argentina (down 1.4 percentage points).
Automotive sector losses from continuing operations outside North
America, Europe, and South America ("Rest of World") were $159 million in 2001,
compared with earnings of $108 million in 2000. The earnings deterioration
reflected Ford's share of a non-cash charge relating to Mazda's pension expenses
and other restructuring actions at Mazda.
New car and truck sales in Australia, our largest market in Rest of
World, were approximately 773,000 units in 2001, down about 14,000 units from a
year ago. In 2001, our combined car and truck market share in Australia was
15.1%, down 0.6 percentage points from 2000, reflecting primarily share
deterioration in the full-size car segment due to continued aggressive
competition.
2000 Compared with 1999
Worldwide earnings from continuing operations for our Automotive sector
were $3,624 million in 2000 on sales of $141 billion, compared with $4,986
million in 1999 on sales of $135 billion. The decrease in earnings reflected
asset impairments and restructuring charges in Europe and lower earnings in
North America, offset partially by improved results in South America. Adjusted
for constant volume and mix, our total costs in the Automotive sector declined
$500 million compared with 1999.
Our Automotive sector earnings from continuing operations in North
America were $4,886 million in 2000 on sales of $103.9 billion, compared with
$5,418 million in 1999 on sales of $99.2 billion. The earnings deterioration
reflected primarily costs associated with the Firestone tire recall and higher
warranty costs related to our 3.8 liter engine, offset partially by increased
volume. The after-tax return on sales for our Automotive sector in North America
was 4.8% in 2000, down 0.7 percentage points from 1999.
In 2000, approximately 17.8 million new cars and trucks were sold in
the United States, up from 17.4 million units in 1999. Our share of those unit
sales was 23.7% in 2000, down 0.1 percentage points from 1999.
E-39
Our Automotive sector losses in Europe were $1,130 million from
continuing operations in 2000, compared with earnings of $50 million a year ago.
The decline reflected primarily the second quarter 2000 charge of $1,019 million
related to asset impairment and restructuring costs for Ford brand operations.
In 2000, approximately 17.9 million new cars and trucks were sold in
our nineteen primary European markets, down from 18.2 million units in 1999. Our
share of those unit sales was 10% in 2000, down 0.2 percentage points from 1999,
reflecting primarily an increase in market share related to our acquisitions of
Volvo Car and Land Rover, offset by a decrease in market share for Ford-brand
vehicles. The decrease in our Ford brand share reflected primarily continued
aggressive competition.
Our Automotive sector in South America lost $240 million from
continuing operations in 2000, compared with a loss of $444 million in 1999. The
improvement reflected primarily higher vehicle margins resulting from cost
reductions and improved product mix and pricing.
In 2000, approximately 1.5 million new cars and trucks were sold in
Brazil, compared with 1.3 million in 1999. Our share of those unit sales was
9.1% in 2000, down 0.6 percentage points from 1999. The decline in market share
reflected increased competition.
Automotive sector earnings from continuing operations in the Rest of
World were $108 million in 2000, compared with earnings of $87 million in 1999.
New car and truck sales in Australia, our largest market in Rest of
World, were approximately 788,000 units in 2000, essentially unchanged from
1999. In 2000, our combined car and truck market share in Australia was 15.7%,
down 1.9 percentage points from 1999, reflecting primarily strong competitive
pressures.
FINANCIAL SERVICES SECTOR RESULTS OF OPERATIONS
Earnings of our Financial Services sector consist primarily of two
segments, Ford Credit and Hertz. Details of our Financial Services sector
earnings for 2001, 2000, and 1999 are shown below (in millions):
Net Income/(Loss)
------------------------------------
2001 2000 1999
----------- ----------- ------------
Ford Credit $839 $1,536 $1,261
Hertz 23 358 336
Minority interests and other (48) (108) (81)
---- ------ ------
Total Financial Services sector $814 $1,786 $1,516
==== ====== ======
2001 Compared with 2000
Ford Credit - not included.
E-40
Earnings at Hertz in 2001 were $23 million. In 2000, Hertz had earnings
of $358 million. The decrease in earnings was primarily due to lower car rental
volume in the United States, reflecting the adverse impact on business travel
and pricing of the slowdown in the United States economy.
2000 Compared with 1999
Ford Credit - not included.
Earnings at Hertz in 2000 were $358 million. In 1999, Hertz had
earnings of $336 million. The increase in earnings reflected primarily strong
volume-related performance, offset partially by downward pricing pressure and
higher interest costs.
LIQUIDITY AND CAPITAL RESOURCES
Automotive Sector
For the Automotive sector, liquidity and capital resources include cash
generated from operations, gross cash balances, our ability to raise funds in
capital markets and committed credit lines.
Gross Cash - Automotive gross cash includes cash and marketable
securities and assets contained in a Voluntary Employee Beneficiary Association
("VEBA") trust, which reflect financial assets available to fund the business
and pay future obligations in the near term, as summarized below (in billions):
December 31,
---------------------------------
2001 2000 1999
---------- ---------- ----------
Cash and cash equivalents $ 4.1 $ 3.4 $ 2.8
Marketable securities 10.9 13.1 18.9
VEBA 2.7 3.7 3.7
------ ------ ------
Gross cash $ 17.7 $ 20.2 $ 25.4
====== ====== ======
E-41
In managing our business, we classify changes in gross cash in three
categories: operating related (including capital expenditures and capital
transactions with the Financial Services sector), acquisitions and divestitures
and financing related. Changes for the last three years are summarized below (in
billions):
December 31,
---------------------------------
2001 2000 1999
---------- ---------- ----------
Present year-end gross cash $17.7 $20.2 $25.4
Prior year-end gross cash 20.2 25.4 25.7
----- ----- -----
Present over (under) prior $(2.5) $(5.2) $(0.3)
===== ===== =====
Operating related cash flows
Automotive net income/(loss) $(6.3) $ 3.6 $ 5.0
Capital expenditures (6.4) (7.4) (7.1)
Depreciation and amortization 5.3 5.4 5.2
Impairment charges (depreciation and amortization) 3.8 1.1 -
Changes in working capital (a) 4.6 4.1 (1.9)
Capital transactions with Financial Services sector (b) 0.4 0.7 0.4
All other (0.1) (0.7) 4.5
----- ----- -----
Total operating related 1.3 6.8 6.1
Acquisitions and divestitures (2.3) (2.7) (5.8)
Financing related
Value Enhancement Plan - (5.6) -
Dividends to shareholders (1.9) (2.8) (2.3)
Issuance of common stock 0.5 0.6 0.3
Purchase of common stock (1.8) (1.8) (0.7)
Changes in total Automotive Sector debt 1.7 0.3 2.1
----- ----- -----
Total financing related (1.5) (9.3) (0.6)
----- ----- -----
Total change in gross cash $(2.5) $(5.2) $(0.3)
===== ===== =====
- --------------------
(a) Working capital includes current assets (excluding cash and marketable
securities) less current liabilities (excluding the current portion of
long-term debt).
(b) Includes capital contributions, dividends, loans, loan repayments and asset
sales.
In 2001, we spent $6.4 billion for capital goods, such as machinery,
equipment, tooling, and facilities, used in our Automotive sector. This was down
$1.0 billion from 2000, reflecting primarily a reduced number of product
introductions. Capital expenditures were 4.8% of sales in 2001, down 0.4
percentage points from a year ago.
The $4.6 billion improvement in working capital in 2001 reflected
primarily lower receivables ($2.2 billion in 2001 compared with $4.7 billion in
2000), resulting largely from implementation of Ford's best practices for
receivables management (mainly at Volvo and Land Rover) and inventory
improvements across much of the company ($6.2 billion in 2001 compared with $7.5
billion in 2000).
Dividends totaling $400 million were paid from Ford Credit to Ford in
2001. However, no dividend payments were made in the fourth quarter of 2001.
Additionally, in January 2002, $700 million of cash was contributed from Ford to
Ford Credit as additional equity, which lowered Ford Credit's debt-to-equity
ratio to 14.1 to 1 (calculated on a basis that treats proceeds from securitized
funding as debt).
In 2001, we spent $2.0 billion for acquisitions of other companies
(primarily the final payment of $1.6 billion to AB Volvo for our acquisition of
Volvo Car) and contributed $735 million to the Financial Services sector for the
purchase of the minority interest in Hertz. These expenditures were offset
partially by divestitures (primarily proceeds of about $400 million from the
sale of assets to our Getrag transmissions joint venture).
E-42
In 2001, we spent $1.8 billion for purchases of our common stock under
our $5 billion share repurchase program ($1.2 billion) and our anti-dilutive
share repurchase program. Issuances of common stock in 2001, reflecting
primarily employee stock option exercises, resulted in the receipt of proceeds
of $500 million.
Debt and Net Cash - At December 31, 2001, our Automotive sector had
total debt of $13.8 billion, up $1.7 billion from a year ago. The weighted
average maturity of this debt is approximately 28 years, of which $902 million
matures by December 31, 2006. At December 31, 2001, our Automotive sector had
net cash (defined as gross cash less total of long-term debt and current portion
of long-term debt) of $3.9 billion, compared with $8.1 billion and $13.7 billion
at the end of 2000 and 1999, respectively.
Credit Facilities - At December 31, 2001, the Automotive sector had
$8.6 billion of contractually committed credit agreements with various banks;
87.4% of this amount is available through June 30, 2006. Ford also has the
ability to transfer, on a non-guaranteed basis, $7.4 billion and $598 million of
these credit lines to Ford Credit and Ford Credit Europe, respectively.
Cumulative Convertible Trust Preferred Securities - On January 30,
2002, we sold 100 million shares of Cumulative Convertible Trust Preferred
Securities to the public at a price of $50 per share, for net proceeds (after
underwriting commissions, but before expenses) of $4,900,000,000. The proceeds
will be used for general corporate purposes. The preferred securities were
issued by Ford Motor Company Capital Trust II, the sole assets of which are the
junior subordinated convertible debentures due January 15, 2032 of Ford Motor
Company. The preferred securities can be converted into shares of Ford common
stock at any time at a conversion price of $17.70 per share. If converted, the
aggregate amount of additional shares of Ford common stock that would be
outstanding would be about 282 million shares.
Financial Services Sector
Ford Credit- not included.
Hertz
Hertz requires funding for the acquisition of revenue earning
equipment, which consists of vehicles and industrial and construction equipment.
Hertz purchases this equipment in accordance with the terms of agreements
negotiated with automobile and equipment manufacturers. The financing
requirements of Hertz are seasonal and are mainly explained by the seasonality
of the travel industry. Hertz's fleet size, and its related financing
requirements, generally peak in the months of June and July, and decline during
the months of December and January. Hertz accesses the global capital markets to
meet its funding needs.
Hertz maintains domestic and foreign commercial paper programs to cover
short-term funding needs, and also draws from bank lines, as a normal business
practice, to fund international needs. Hertz also is active in the medium-term
and long-term debt markets.
During 2001, Hertz aligned its funding strategy with Ford Credit's by
reducing its reliance on commercial paper and increasing its use of long-term
funding sources to improve its liquidity, and is planning on launching an
asset-backed securitization program during the second quarter of 2002.
At December 31, 2001, Hertz had committed credit facilities totaling
$3.4 billion. Of this amount, $2.6 billion represents global and other committed
credit facilities ($1.1 billion of which are available through June 30, 2006 and
$1.6 billion of which have various maturities of up to four years); $200 million
consists of seasonal short-term facilities; and $500 million consists of a
revolving credit line provided by Ford, which currently expires in June 2003.
Total Company
Stockholders' Equity - Our stockholders' equity was $7.8 billion at
December 31, 2001, down $10.8 billion compared with December 31, 2000. This
decrease reflected primarily net losses
E-43
of $5.5 billion, dividend payments of $1.9 billion, foreign currency translation
adjustments of $1.2 billion (primarily reflecting weakening currencies in
Europe), a net charge to equity on derivative financial instruments in
accordance with SFAS No. 133 of $1.1 billion (primarily foreign currency hedges
and interest rate swaps) and $1.2 billion spent on share repurchases.
Dividends and Share Repurchases - In October 2001, our board of
directors declared a fourth quarter 2001 dividend on Ford's common and Class B
stock of $0.15 per share, which represented a 50% reduction from the $0.30 per
share dividend that had been paid since the fourth quarter of 2000. On January
11, 2002, our board of directors further reduced the quarterly dividend on
common and Class B stock by declaring a first quarter 2002 dividend of $0.10 per
share, which represented a 33% reduction from the fourth quarter 2001 dividend.
These dividend reductions will yield cash savings of nearly $1.5 billion
annually. Also, during 2001 we purchased $1.2 billion of our common stock under
our $5 billion share repurchase program that had commenced in September 2000.
However, in May 2001, we suspended share repurchases indefinitely.
Debt Ratings - Our short- and long-term debt are rated by three major
rating agencies: Fitch, Inc. ("Fitch"); Moody's Investors Service, Inc.
("Moody's"); and Standard & Poor's Rating Services, a division of McGraw-Hill
Companies, Inc. ("S&P"). In addition to these three rating agencies, we also are
rated in several local markets by locally recognized rating agencies. Debt
ratings reflect an assessment by the rating agencies of the credit risk
associated with particular securities we issue, and are based on information
provided by us or other sources that rating agencies consider reliable. Lower
ratings generally result in higher borrowing costs and reduced access to capital
markets. Long- and short-term debt ratings of BBB- and F3 or higher by Fitch,
Baa3 and P-3 or higher by Moody's and BBB- and A3 or higher by S&P are
considered "investment grade." However, debt ratings are not recommendations to
buy, sell, or hold securities and are subject to revision or withdrawal at any
time by the assigning rating agency. Each rating agency may have different
criteria in evaluating the risk associated to a company, and therefore ratings
should be evaluated independently for each rating agency.
Fitch Ratings. On September 26, 2001, Fitch lowered the long-term debt
ratings of Ford, Ford Credit and Hertz from A+ to A- and lowered Ford Credit's
and Hertz' short-term debt ratings from F1 to F2 with a negative outlook for all
entities. On January 11, 2002, Fitch lowered the long-term debt ratings of Ford,
Ford Credit and Hertz from A- to BBB+, confirmed Ford Credit's and Hertz's
short-term debt rating at F2, and confirmed the rating outlook for all companies
as negative.
Moody's Ratings. On October 18, 2001, Moody's lowered Ford's long-term
debt rating from A2 to A3, affirmed Ford Credit's long- and short-term debt
ratings at A2 and Prime-1, respectively, and changed the rating outlook for both
companies from stable to negative. Moody's also lowered Hertz' long- and
short-term debt ratings from A3 to Baa1 and from Prime-1 to Prime-2,
respectively, and changed its rating outlook on Hertz to negative. On January
16, 2002, Moody's lowered Ford's long term debt rating from A3 to Baa1, lowered
Ford Credit's long- and short-term debt ratings from A2 to A3 and from Prime-1
to Prime-2, respectively, and confirmed the rating outlook of both companies as
negative. Moody's also lowered Hertz' long-term debt rating from Baa1 to Baa2,
confirmed its short-term debt rating at Prime-2 and confirmed its rating outlook
as negative.
S&P Ratings. On October 15, 2001, S&P lowered the long-term debt
ratings of Ford and Ford Credit from A to BBB+, lowered Ford Credit's short-term
debt rating from A-1 to A-2, and changed the rating outlook for both companies
from negative to stable. S&P also lowered Hertz's long- and short-term debt
ratings from A- to BBB and from A-1 to A-2, respectively, and changed its rating
outlook to stable. On January 11, 2002, S&P changed the rating outlook for all
companies to negative.
Contractual Obligations and Commitments - For information regarding
debt and other obligations of the Automotive and Financial Services sectors,
including amounts maturing in each of the next five years, see Note 11 of the
Notes to our Consolidated Financial Statements. In addition, we, as part of our
normal business practices, enter into long-term arrangements with suppliers for
purchases of certain raw materials, components and services. These arrangements
may contain fixed/minimum quantity purchase requirements. We enter into such
arrangements to facilitate adequate supply of these materials and services.
E-44
HERTZ PURCHASE
In March 2001, through a tender offer and a merger transaction, we
acquired (for a total price of about $735 million) the common stock of Hertz
that we did not own, which represented about 18% of the economic interest in
Hertz. As a result, Hertz has become an indirect, wholly-owned subsidiary.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations", effective for all business combinations
initiated after June 30, 2001. The Statement requires that the purchase method
of accounting be used for all business combinations and specifies that certain
acquired intangible assets in a business combination be recognized as assets
separately from goodwill and existing intangible assets and goodwill be
evaluated for these new separation requirements. We do not expect adoption of
this Statement to have a material impact on our consolidated financial position
or results of operations.
We adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on
January 1, 2002. Goodwill and certain intangible assets will no longer be
amortized, but will be subject to an annual impairment test. At year-end 2001,
we had goodwill of $6.6 billion and other intangible assets of $1.3 billion. We
are presently evaluating the amount of the transitional impairment, which may
range up to $2 billion or more, related to Kwik-Fit and other investments.
Goodwill and indefinite-lived intangible asset amortization of about $250
million after taxes was charged to income in 2001.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which requires entities to establish liabilities for
legal obligations associated with the retirement of tangible long-lived assets.
We will adopt the Statement on January 1, 2003. Although we are assessing the
impact, we do not expect adoption of this Statement to have a material impact on
our consolidated financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement superseded SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and addresses financial accounting and reporting for
impairment of long-lived assets to be held and used, and long-lived assets and
components of an entity to be disposed of. We adopted this Statement on January
1, 2002. Although we are assessing the impact, we do not expect this Statement
to have a material impact on our consolidated financial position or results of
operations.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in conformity with
United States generally accepted accounting principles. The preparation of these
financial statements requires the use of estimates, judgments, and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the periods presented. The significant accounting principles which we believe
are the most important to aid in fully understanding our financial results are
the following:
Product warranties - estimated warranty costs for each vehicle sold by
us are accrued at the time the vehicle is sold to a dealer. Estimates for
warranty costs are made based primarily on historical warranty claim experience.
Included in our warranty cost accruals are costs for basic warranties on
vehicles we sell, extended service plans (i.e., where customers pay a fee to
have extended warranty coverage beyond the base warranty period), product
recalls and customer satisfaction actions outside the base warranty. An example
of a customer satisfaction action would be our Firestone tire replacement action
begun in May 2001, in which we offered to replace 13 million Firestone tires
installed on our vehicles. Warranty cost accruals are adjusted from time to time
when actual warranty claim experience differs from that estimated.
Marketing incentives - costs for customer and dealer cash incentives
and costs for special financing and leasing programs that we sponsor through
Ford Credit (e.g., 0.0% financing program) are recognized as sales reductions at
the later of the date the related vehicle sales are recorded or at the date the
incentive program is both
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approved and communicated. In general, the amount of financing cost that we
provide to Ford Credit is the difference between the amounts offered to retail
customers and a market-based interest or lease rate. Costs for marketing
incentives are based upon assumptions regarding the number of vehicles that will
have a specific incentive applied against them. To the extent the actual number
of vehicles differs from this estimate, or if a different mix of incentives
occurs, the marketing expense accruals are adjusted.
Retirement benefits - our employee pension and other postretirement
benefit (i.e., health care and life insurance) costs and obligations are
dependent on our assumptions used by actuaries in calculating such amounts.
These assumptions include discount rates, health care cost trends rates,
inflation, salary growth, long-term return on plan assets, retirement rates,
mortality rates and other factors. We base the discount rate assumption on
investment yields available at year-end on AA-rated corporate long-term bond
yields. Our health care cost trend assumptions are developed based on historical
cost data, the near-term outlook, and an assessment of likely long-term trends.
Our inflation assumption is based on an evaluation of external market
indicators. The salary growth assumptions reflect our long-term actual
experience, the near-term outlook and assumed inflation. Retirement and
mortality rates are based primarily on actual plan experience. Actual results
that differ from our assumptions are accumulated and amortized over future
periods and, therefore, generally affect our recognized expense and recorded
obligation in such future periods. While we believe that the assumptions used
are appropriate, significant differences in actual experience or significant
changes in assumptions would affect our pension and other postretirement
benefits costs and obligations. See Note 17 of the Notes to our Consolidated
Financial Statements for more information regarding costs and assumptions for
employee retirement benefits.
Impairment of long-lived assets - we periodically review the carrying
value of our long-lived assets held and used and assets to be disposed of,
including goodwill and other intangible assets, when events and circumstances
warrant such a review. We evaluate the carrying value of long-lived assets for
potential impairment on a regional operating business unit basis using
undiscounted after-tax estimated cash flows or on an individual asset basis if
the asset is held for sale. See Note 16 of the Notes to our Consolidated
Financial Statements for information regarding impairment charges incurred in
respect of our North and South American Automotive operations in 2001 and our
European Automotive operations in 2000.
Allowance for credit losses - not included.
Depreciation expense on operating leases and residual values - not
included.
OUTLOOK
Industry Sales Volumes and Financial Results
Our outlook for car and truck (including heavy trucks) industry sales in 2002 in
our major markets is as follows:
United States -- approximately 16.5 million units, compared with the 17.5 million
units sold in 2001
Europe -- approximately 16.9 million units, compared with the 17.8 million
units sold in 2001 (both figures based on nineteen markets)
Brazil -- approximately 1.4 million units, compared with the 1.6 million units
sold in 2001
Australia -- approximately 790,000 units, compared with the 773,000 units
sold in 2001
Based on these and other assumptions (e.g., assumptions regarding
marketing costs, which are expected to be higher in 2002), we expect 2002
earnings (excluding unusual items) to be about breakeven, with the Automotive
sector incurring significant losses and the Financial Services sector providing
offsetting profits. In addition, we expect the operating related changes in
gross cash for the Automotive sector (calculated on the basis described under
"Liquidity and Capital Resources - Automotive Sector - Gross Cash) to be
negative in 2002. Similar to the improvements in cost and the other expected
benefits of the Revitalization Plan, we expect to achieve meaningful
improvements in such operating cash flow by mid-decade.
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2002 Financial Milestones
We have set and communicated certain financial milestones for 2002.
While we hope to achieve these goals, they should not be interpreted as
projections, expectations or forecasts of 2002 results. The financial milestones
for 2002 are as follows:
Restructuring Priorities 2002 Milestone
------------------------ ----------------------------------------------
Communicate/implement plans Report on progress
Quality (U.S.) Improve J.D. Power Initial Quality Survey
Capacity utilization (North America) Improve by 10%
Non-product-related cost Reduce by $2 billion
Divest non-core operations $1 billion cash realization
Financial Results
-----------------
Corporate
Pre-tax earnings (excluding
unusual items) Positive
Capital spending $7 billion
Europe Improve results
South America Improve results
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: increasing price
competition in the U.S. and Europe resulting from industry overcapacity,
currency fluctuations or other factors; a significant decline in industry sales,
particularly in the United States or Europe, resulting from slowing economic
growth or other factors; lower-than-anticipated market acceptance of our new or
existing products; currency or commodity price fluctuations; availability of
fuel; a market shift from truck sales in the United States;
lower-than-anticipated residual values for leased vehicles; a credit rating
downgrade, labor or other constraints on our ability to restructure our
business; increased safety, emissions, fuel economy or other regulation
resulting in higher costs and/or sales restrictions; work stoppages at key Ford
or supplier facilities or other interruptions of supplies; the discovery of
defects in vehicles resulting in delays in new model launches, recall campaigns,
increased warranty costs or litigation; insufficient credit loss reserves; and
our inability to implement the Revitalization Plan.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
OVERVIEW
We are exposed to a variety of market and other risks, including the
effects of changes in foreign currency exchange rates, commodity prices,
interest rates, as well as risks to availability of funding sources, hazard
events, and specific asset risks. These risks affect our Automotive and
Financial Services sectors differently. We monitor and manage these exposures as
an integral part of our overall risk management program, which includes regular
reports to a central management committee that oversees global risk management
practices. Our risk management program recognizes the unpredictability of
markets and seeks to reduce profit volatility. For more information on these
financial exposures, see Notes 1 and 14 of the Notes to our Consolidated
Financial Statements.
Our Automotive and Financial Services sectors also are exposed to
liquidity risk, or the possibility of having to curtail their businesses or
being unable to meet present and future financial obligations as they come due
because funding sources may be reduced or become unavailable. We, and
particularly Ford Credit, which comprises substantially all of our Financial
Services sector, maintain plans for sources of funding to ensure liquidity
through any economic or business cycle. As discussed in greater detail in Item
7, our funding sources include commercial paper, term debt, sale of receivables
through securitization transactions, committed lines of credit from major banks,
and other sources.
We also are exposed to a variety of insurable risks, such as loss or
damage to property, liability claims, and employee injury. We protect against
these risks through a combination of self insurance and the purchase of
commercial insurance designed to protect against events that could generate
significant losses.
The market and counterparty risks of our Automotive sector and Ford
Credit are discussed and quantified below.
AUTOMOTIVE MARKET AND COUNTERPARTY RISK
Our Automotive sector frequently has expenditures and receipts
denominated in foreign currencies, including the following: purchases and sales
of finished vehicles and production parts, debt and other payables, subsidiary
dividends, and investments in affiliates. These expenditures and receipts create
exposures to changes in exchange rates. We also are exposed to changes in prices
of commodities used in our Automotive sector.
FOREIGN CURRENCY RISK
Foreign currency risk is the possibility that our financial results
could be better or worse than planned because of changes in exchange rates. We
use derivative instruments to hedge assets, liabilities and firm commitments
denominated in foreign currencies. Our hedging policy is designed to reduce
income volatility and is based on clearly defined guidelines. Speculative
actions are not permitted. In our hedging actions, we use primarily instruments
commonly used by corporations to reduce foreign exchange, interest rate and
other price risks (e.g., forward contracts, options and interest rate swaps). We
use a value-at-risk ("VAR") analysis to evaluate our exposure to changes in
foreign currency exchange rates. The primary assumptions used in the VAR
analysis are as follows:
- A Monte Carlo simulation model is used to calculate changes in
the value of currency derivative instruments (e.g., forwards
and options) and all significant underlying exposures. The VAR
analysis includes an 18-month exposure and derivative hedging
horizon and a one-month holding period.
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- The VAR analysis calculates the potential risk, within a 99%
confidence level, on cross-border currency cash flow
exposures, including the effects of foreign currency
derivatives. (Translation exposures are not included in the
VAR analysis). The Monte Carlo simulation model uses
historical volatility and correlation estimates of the
underlying assets to produce a large number of future price
scenarios, which have a statistically lognormal distribution.
- Estimates of correlations and volatilities are drawn primarily
from the RiskMetrics(TM) datasets.
Hedging actions substantially reduce our risk to changes in currency
rates. Based on our overall currency exposure (including derivative positions)
during 2001, the risk during 2001 to our pre-tax cash flow from currency
movements was on average $300 million, with a high of $350 million and a low of
$275 million. At December 31, 2001, currency movements are projected to affect
our pre-tax cash flow over the next 18 months by less than $275 million, within
a 99% confidence level. Compared with our projection at December 31, 2000, the
2001 VAR amount is approximately $25 million lower, primarily because of
decreased currency exchange rate volatility.
COMMODITY PRICE RISK
Commodity price risk is the possibility of higher or lower costs due to
changes in the prices of commodities, such as non-ferrous (e.g., aluminum) and
precious metals (e.g., palladium, platinum and rhodium), ferrous alloys (e.g.,
steel), energy (e.g., natural gas) and plastics (e.g., polypropylene), which we
use in the production of motor vehicles. We use derivative instruments to hedge
the price risk associated with the purchase of those commodities that we can
economically hedge. The fair value liability of such contracts, excluding the
underlying exposures, as of December 31, 2001 and 2000 was approximately a
negative $259 million and a positive $56 million, respectively. The potential
change in the fair value of commodity forward and option contracts, assuming a
10% change in the underlying commodity price, would be approximately $267
million and $280 million at December 31, 2001 and 2000, respectively. This
amount excludes the offsetting impact of the price change we would experience in
purchasing the underlying commodities.
In addition to these price-hedging activities, our procurement
activities ensure that we have adequate supplies of raw materials used in our
business. These procurement activities utilize forward purchase contracts,
long-term supply contracts and stockpiles. The $1 billion pre-tax write-down of
precious metals, discussed in Note 16 of the Notes to our Consolidated Financial
Statements, related to these procurement activities. In conjunction with this
write-down, we modified our processes so that any price-hedging inherent in our
procurement activities is executed by or coordinated with our Treasurer's
Office, which manages our price-hedging activity.
Our price-hedging policy is based on clearly defined guidelines.
Speculative actions are not permitted. In 2001, we enhanced our risk evaluation
to include a VAR analysis, using historical volatilities, to evaluate our
exposure to changes in commodity prices given our financial hedges, forward
procurement and supply contracts on those commodities which we hedge.
Based on our commodity exposure and related hedging activity, at
December 31, 2001, commodity price movements are projected to affect our pre-tax
cash flow over the next twelve months by up to $167 million, within a 99%
confidence level. Over the last year the VAR measurements averaged $339 million,
with a high of $625 million and a low of $167 million. These risk levels are
substantially lower than they would otherwise be without hedging actions.
COUNTERPARTY RISK
Counterparty risk relates to the loss we could incur if a counterparty
defaulted on an investment or a derivative contract. Exposures managed are
financial and primarily relate to investments in fixed-income products and
derivative transactions for the purpose of managing interest rate, currency and
commodity risk. We, together with Ford Credit, establish exposure limits for
each counterparty to minimize risk and provide counterparty diversification.
Exposures are monitored on a regular basis.
Our approach to managing counterparty risk is forward-looking and
proactive, allowing us to take risk mitigation actions. Exposure limits are
established for both mark-to-market and future potential exposure, based on our
overall risk tolerance and ratings-based historical default probabilities. A
Monte Carlo simulation technique is utilized to generate the potential exposure
by tenor, within a 95% confidence level (market convention). Estimates of
correlations and volatilities are drawn from RiskMetrics(TM) datasets.
FORD CREDIT MARKET AND OTHER RISKS - NOT INCLUDED.
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