How much did Ford actually earn excluding the one-time gain from The Associates spin-off?

Ford reported $22.07 billion in net income for 1998, but this included a $15.96 billion non-cash gain from the spin-off of The Associates and $177 million of Associates earnings through March 12, 1998. Excluding those amounts, net income was $5.94 billion, or $4.72 per diluted share, compared with $6.09 billion, or $4.94 per diluted share, in 1997. The underlying earnings figure is therefore lower year over year.

How did the Automotive sector perform, and where were the main problems?

Automotive earned $4.75 billion in 1998, roughly flat with 1997, on sales of $119.1 billion. North America was the strength, with $4.61 billion in earnings, a 5.3% after-tax return on sales, and cost reductions that lowered total costs by $2.2 billion. Europe earned $193 million, down $80 million, as market share fell to 10.3% and the new Focus launch weighed on results. South America lost $226 million amid weak Brazilian demand. Q4 results included $363 million of one-time charges in North America.

What are the biggest legal and regulatory risks disclosed in the filing?

Ford faces several large product-liability claims. Bronco II rollover suits seek about $1.8 billion and occupant-restraint suits about $1 billion in specified damages, while asbestos claims total about $2.1 billion. In class actions, the TFI module case in California covers about 3.2 million vehicles and could exceed $4 billion if plaintiffs prevailed in full, and the paint defect and ignition-switch cases are also pending. On regulation, the proposed advanced air bag rule, tighter CARB and EPA emissions standards that could limit diesel use, and CAFE pressure could raise costs or restrict product offerings. Management says the outcome of these matters is not predictable, and it does not expect a material effect on any single year's results, though that is not guaranteed.

What is the status of the Volvo acquisition and how will it be funded?

On March 1, 1999, Ford agreed to buy AB Volvo's worldwide passenger car business for $6.45 billion. Volvo shareholders approved the deal on March 8, 1999, and closing is subject to regulatory approvals. The filing does not detail the financing plan, but Automotive sector cash and marketable securities were $23.8 billion at December 31, 1998, which gives Ford substantial liquidity to fund the purchase.

What should investors watch in 1999?

Key watch items include the 1999 targets: a North American after-tax return above 5%, a $1 billion reduction in total costs, and $8.5 billion of capital spending. Management has also warned that Brazil's market has deteriorated more than expected, so South American results are forecast to be worse. The UAW and Canadian Auto Workers contracts expire in September 1999, creating work-stoppage risk. The Rouge powerhouse explosion on February 1, 1999 halted power production, with production since restored through alternative sources, though a key steel supplier had not yet resumed full output. Industry outlook calls for U.S. sales of 15.5 to 16 million units, below or near 1998's 16 million, and lower European and Brazilian volumes.

FORD MOTOR CO 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 17, 1999. Cited figures are marked; the original filing is the authoritative source.

Ford Motor Company's 1998 annual report (10-K filed March 17, 1999) shows a year dominated by a one-time, non-cash event.

Net income reached a record $22.07 billion^a, or $17.76 per diluted share, but that figure includes a $15.96 billion gain from the spin-off of The Associates. Excluding The Associates-related amounts, net income was $5.94 billion, or $4.72 per diluted share, compared with $6.09 billion ($4.94) in 1997. Revenue fell to $144.4 billion from $153.6 billion, and the company sold 6.82 million vehicles, down about 1.8% from 6.95 million in 1997.

Investors should look at the underlying operating trend rather than the headline earnings figure. The Automotive sector earned $4.75 billion^b, roughly flat with 1997, but mix was uneven. North America was strong, with after-tax return on sales of 5.3% and North American earnings of $4.61 billion, while Europe (market share down 1.1 points to 10.3%) and South America (a $226 million loss) weakened.

Q4 1998 also carried $631 million^c of one-time charges, including early retirement programs, a Kia write-off, and the Batavia transmission plant transfer. Management's 1999 targets include a North American after-tax return above 5%, a $1 billion reduction in total costs, and capital spending of $8.5 billion. The company also agreed to acquire Volvo's passenger car business for $6.45 billion, pending regulatory approval.

Risk factors are substantial. Ford faces large product-liability exposure, including Bronco II and occupant-restraint claims totaling about $2.8 billion^d and asbestos claims of about $2.1 billion. The ignition-switch and paint class actions are also pending, along with a California TFI module case in which plaintiffs' claimed damages could exceed $4 billion.

The UAW contract expires in September 1999, creating work-stoppage risk. Regulatory pressure from CAFE, emissions, and air-bag rules could also affect product mix and costs. Financial Services earnings were $17.3 billion including the spin-off gain, but excluding The Associates the sector earned $1.19 billion, down from $1.37 billion, mainly due to lower residual values at Ford Credit.

02—Key points

Key Highlights

Record reported 1998 net income of $22.07 billion ($17.76 per diluted share), but $15.96 billion of this was a non-cash gain from the spin-off of The Associates; excluding Associates-related items, net income was $5.94 billion ($4.72 per share).
Automotive sector net income was $4.75 billion, nearly flat year over year, with North America delivering a 5.3% after-tax return on sales, offset by losses in South America (-$226 million) and weaker European earnings ($193 million).
Total revenue declined to $144.4 billion from $153.6 billion, and worldwide vehicle sales fell 1.8% to 6.82 million units, reflecting lower volume and the discontinuation of low-margin lines.
Q4 1998 included $631 million in one-time charges, including $472 million for employee early retirement and separation programs, an $86 million Kia write-off, and a $73 million Batavia transmission plant charge.
Automotive net cash was $14.0 billion at year-end, with cash and marketable securities of $23.8 billion, supporting the $6.45 billion agreement to acquire Volvo's passenger car business.
Significant litigation exposure, including Bronco II and occupant-restraint claims (roughly $2.8 billion in specified damages), asbestos claims (about $2.1 billion), and a California TFI module class action with potential exposure above $4 billion.
1999 targets call for a North American after-tax return above 5%, a $1 billion reduction in total costs, and $8.5 billion in capital spending, with the UAW contract expiring in September 1999 as a key labor risk.

03—Questions

Frequently Asked Questions

How much did Ford actually earn excluding the one-time gain from The Associates spin-off?
Ford reported $22.07 billion in net income for 1998, but this included a $15.96 billion non-cash gain from the spin-off of The Associates and $177 million of Associates earnings through March 12, 1998. Excluding those amounts, net income was $5.94 billion, or $4.72 per diluted share, compared with $6.09 billion, or $4.94 per diluted share, in 1997. The underlying earnings figure is therefore lower year over year.
How did the Automotive sector perform, and where were the main problems?
Automotive earned $4.75 billion in 1998, roughly flat with 1997, on sales of $119.1 billion. North America was the strength, with $4.61 billion in earnings, a 5.3% after-tax return on sales, and cost reductions that lowered total costs by $2.2 billion. Europe earned $193 million, down $80 million, as market share fell to 10.3% and the new Focus launch weighed on results. South America lost $226 million amid weak Brazilian demand. Q4 results included $363 million of one-time charges in North America.
What are the biggest legal and regulatory risks disclosed in the filing?
Ford faces several large product-liability claims. Bronco II rollover suits seek about $1.8 billion and occupant-restraint suits about $1 billion in specified damages, while asbestos claims total about $2.1 billion. In class actions, the TFI module case in California covers about 3.2 million vehicles and could exceed $4 billion if plaintiffs prevailed in full, and the paint defect and ignition-switch cases are also pending. On regulation, the proposed advanced air bag rule, tighter CARB and EPA emissions standards that could limit diesel use, and CAFE pressure could raise costs or restrict product offerings. Management says the outcome of these matters is not predictable, and it does not expect a material effect on any single year's results, though that is not guaranteed.
What is the status of the Volvo acquisition and how will it be funded?
On March 1, 1999, Ford agreed to buy AB Volvo's worldwide passenger car business for $6.45 billion. Volvo shareholders approved the deal on March 8, 1999, and closing is subject to regulatory approvals. The filing does not detail the financing plan, but Automotive sector cash and marketable securities were $23.8 billion at December 31, 1998, which gives Ford substantial liquidity to fund the purchase.
What should investors watch in 1999?
Key watch items include the 1999 targets: a North American after-tax return above 5%, a $1 billion reduction in total costs, and $8.5 billion of capital spending. Management has also warned that Brazil's market has deteriorated more than expected, so South American results are forecast to be worse. The UAW and Canadian Auto Workers contracts expire in September 1999, creating work-stoppage risk. The Rouge powerhouse explosion on February 1, 1999 halted power production, with production since restored through alternative sources, though a key steel supplier had not yet resumed full output. Industry outlook calls for U.S. sales of 15.5 to 16 million units, below or near 1998's 16 million, and lower European and Brazilian volumes.

04—Continue

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