01—Abstract
Summary
Summary of the 10-K filed March 14, 2003. Cited figures are marked; the original filing is the authoritative source.
Ford Motor Company's 2002 Form 10-K shows a company in transition.
Total Company net loss was $980 milliona in 2002 (versus a $5.45 billion loss in 2001), though income from continuing operations improved to $284 million from a $5.35 billion loss. The Automotive sector lost $987 million from continuing operations in 2002, an improvement from $6.16 billion in 2001, driven mainly by the non-recurrence of 2001 impairments and Revitalization Plan charges. The Financial Services sector earned $1.27 billion, up from $806 million, led by Ford Credit ($1.24 billion).
Results were weighed down by a $1.0 billionb after-tax SFAS 142 goodwill impairment charge, the $708 million Automotive portion of which relates mainly to Kwik-Fit, and by continued U.S. market share erosion, with Ford's combined U.S. car and truck share falling to 21.1% from 22.8%. Worldwide unit sales were 6.97 million, down slightly from 7.01 million. Balance sheet and credit quality are the key investor concerns.
Stockholders' equity fell to $5.6 billionc from $7.8 billion, mainly because of a $5.3 billion pension-related charge to equity from underfunding, which totaled $15.6 billion worldwide. Ford Credit's net credit losses rose to $2.36 billion on owned receivables, and its owned loss-to-receivables ratio climbed to 1.72% from 1.36%. Automotive gross cash increased to $25.3 billion, helped by $4.9 billion from the 6.5% convertible trust preferred issuance and $2.6 billion in tax refunds.
Ratings remained under pressure: Moody's affirmed Ford at Baa1 and S&P at BBB, both with negative outlooks, while Fitch rated Ford BBB+ with a negative outlook. Management's 2003 targets call for a breakeven pre-tax result in the Automotive sector and full-year EPS of about $0.70d, and the company faces a UAW contract expiring in September 2003 along with ongoing product liability and class action exposure, including the Firestone matters and the Romo punitive damages case. For investors, the central questions are whether the Revitalization Plan, which targets $7 billion in pre-tax income by mid-decade, can restore Automotive profitability despite share losses, rising health care and pension costs, and labor negotiations, and whether Ford can protect its credit ratings while funding Ford Credit's large balance sheet.
02—Key points
Key Highlights
- Total Company net loss narrowed to $980 million in 2002 from $5.45 billion in 2001. Income from continuing operations swung to $284 million from a $5.35 billion loss, though the result includes a $1.0 billion after-tax SFAS 142 goodwill impairment charge.
- Automotive sector loss from continuing operations improved to $987 million from $6.16 billion, mainly from the non-recurrence of 2001 impairments and Revitalization Plan charges, and from the $2 billion non-product cost reduction milestone.
- Financial Services sector income rose to $1.27 billion from $806 million, with Ford Credit contributing $1.24 billion, up $404 million, mainly from lower credit loss provisions.
- U.S. combined car and truck market share fell to 21.1% from 22.8%, and worldwide unit sales declined to 6.97 million from 7.01 million, reflecting increased competition and the discontinuation of four vehicle lines.
- Stockholders' equity dropped to $5.6 billion from $7.8 billion, largely due to a $5.3 billion charge from pension underfunding that brought the worldwide shortfall to $15.6 billion.
- Automotive gross cash rose to $25.3 billion, supported by $4.9 billion from the convertible trust preferred issuance and $2.6 billion in tax refunds, and the Automotive sector ended 2002 with net cash of $11.1 billion.
- Credit ratings were downgraded during 2002 and remain under negative outlooks at all three agencies. Ford's long-term ratings are Baa1 (Moody's), BBB (S&P) and BBB+ (Fitch), and the 2003 guidance targets Automotive breakeven pre-tax income and about $0.70 full-year diluted EPS.
03—Questions
Frequently Asked Questions
Did Ford return to profitability in 2002?
Not on a net basis. Ford reported a 2002 net loss of $980 million, which includes a $1.0 billion after-tax cumulative effect charge from goodwill impairment. Income from continuing operations was positive at $284 million, compared with a $5.35 billion loss in 2001, but the Automotive sector still lost $987 million from continuing operations. Financial Services was the main source of profit.
What is driving the weakness in Ford's Automotive business?
Market share losses in the U.S. are the main issue. Ford's combined U.S. share fell to 21.1% from 22.8%, and U.S. marketing costs rose to 15.8% of sales from 14.7%. Losses in Europe reflected the Kwik-Fit sale loss and restructuring charges, and South America remained negative, although improved. Management says the Revitalization Plan and cost reductions should help, but North America's continued share erosion and higher product-related costs are the key risks to that plan.
What are the main balance sheet risks for investors?
Pension underfunding of $15.6 billion worldwide cut stockholders' equity by $5.3 billion in 2002, and Ford's stockholders' equity fell to $5.6 billion. Ford Credit carries about $140 billion of total debt, with a managed debt-to-equity ratio of 12.8 to 1. Ford Credit's owned loss-to-receivables ratio rose to 1.72%, and the FIN 46 consolidation of variable interest entities could materially affect 2003 earnings. Management also notes that a further downgrade could raise borrowing costs.
What does Ford expect for 2003?
Management's milestones target Automotive pre-tax income of breakeven and Automotive operating cash flow of breakeven, improvement in Ford Credit's cash contribution to the parent, and capital spending of $8 billion. Ford expects full-year 2003 diluted EPS of about $0.70 and first-quarter EPS of about $0.20. These targets assume U.S. industry volume of 16.5 million units and zero net pricing in the U.S.
What legal and labor risks could affect Ford?
The UAW contract expires September 14, 2003, and a new agreement could raise costs above current assumptions. Ford faces many product liability and class action suits, including Firestone-related personal injury and class actions, the Romo punitive damages case (a $290 million verdict that Ford has petitioned to take to the U.S. Supreme Court), and a growing number of asbestos claims, which rose to about 25,000 as of February 28, 2003. Environmental exposure is also significant, and the company cannot reasonably estimate some of its potential liabilities.
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