01—Abstract
Summary
Summary of the 10-K/A filed November 14, 2006. Cited figures are marked; the original filing is the authoritative source.
Ford Motor Company's Form 10-K/A for fiscal 2005, filed November 14, 2006, restates prior results to correct the accounting for interest rate swaps at Ford Credit that did not meet SFAS 133 Paragraph 68's 'assumption of no ineffectiveness.' The restatement reduces 2005 net income to $1.44 billiona ($0.77 per diluted share) from $2.02 billion originally reported, and cuts 2004 net income to $3.04 billion from $3.49 billion.
Retained earnings and equity are also restated; year-end 2005 stockholders' equity is $13.4 billionb. The filing also discloses a material weakness in internal control over derivatives accounting, which Ford states was remediated as of the filing date, and management's prior conclusion that controls were effective was revised to 'not effective' as of December 31, 2005. The underlying operating picture is weak.
The Automotive sector posted a pre-tax loss of $3.9 billionc in 2005, driven by Ford North America losses, a $1.3 billion Jaguar/Land Rover impairment, and personnel-reduction charges. U.S. combined car and truck market share fell to 18.2% from 22.8% in 2001. Ford Credit remained the main profit engine, with Financial Services pre-tax income of $5.0 billion aided by a $1.1 billion gain on the sale of Hertz.
Management guides to an automotive loss in 2006 and the Way Forward plan calls for idling 14 North American plants by 2012. Credit ratings were cut to sub-investment grade (BB-/Ba3 range) in early 2006.
For investors, the key issues are the restatement's reduction of reported earnings, the credibility of internal controls, and whether the Way Forward restructuring can stabilize North American share and profitability. Note that this amendment reflects data as of the original March 2006 filing, and later events are not reflected.
02—Key points
Key Highlights
- Restated 2005 net income is $1.44 billion ($0.77 per diluted share), down from the originally reported $2.02 billion, due to $(873) million of pre-tax fair value interest rate swap adjustments and out-of-period items.
- Restated 2004 net income is $3.04 billion, down from $3.49 billion originally reported; 2003 net income is $239 million versus $495 million previously reported.
- Automotive sector pre-tax loss widened to $(3.9) billion in 2005, including a $1.3 billion Jaguar/Land Rover impairment and $1.0 billion of personnel-reduction charges.
- U.S. combined car and truck market share fell to 18.2% in 2005 from 22.8% in 2001, and North American plant utilization was roughly 75%.
- Financial Services pre-tax income was $5.0 billion in 2005, including a $1.1 billion gain on the sale of Hertz, with Ford Credit contributing $2.9 billion.
- Management identified a material weakness in controls over derivative hedge accounting, reversed its earlier conclusion that internal control was effective, and states it was remediated as of November 14, 2006.
- Management expects an automotive pre-tax loss in 2006, with North American operations projected to return to profitability no later than 2008 under the Way Forward plan.
03—Questions
Frequently Asked Questions
Why was Ford's 10-K restated, and how much did earnings change?
Ford reassessed its use of the 'assumption of no ineffectiveness' under SFAS 133 Paragraph 68 for interest rate swaps at Ford Credit. Although the swaps were economically effective hedges, most failed Paragraph 68's specific criteria, so changes in their fair value must be recognized through earnings. Restated 2005 net income is $1.44 billion versus $2.02 billion originally reported, a reduction of roughly $584 million after tax. The restatement also covers 2004, 2003, and selected data back to 2001.
What is the status of the material weakness in internal controls?
Management concluded that the control deficiency over derivative hedge accounting was a material weakness as of December 31, 2005, and revised its earlier conclusion that internal control was effective. Ford states it fully remediated the weakness as of the filing date, through a review of hedging contracts, revised documentation requirements, and an October 27, 2006 directive suspending use of Paragraph 68. PricewaterhouseCoopers issued an adverse opinion on internal control over financial reporting for 2005.
How is the core automotive business performing?
The Automotive sector lost $3.9 billion before taxes in 2005, compared with a $178 million loss in 2004. Losses were concentrated in Ford North America, which posted a $2.4 billion pre-tax loss, and in PAG, which absorbed the Jaguar/Land Rover impairment. Ford expects the automotive sector to be unprofitable in 2006, with North America returning to profit by 2008 if the Way Forward plan succeeds.
Is Ford's credit rating a concern for investors?
Yes. In late 2005 and early 2006, Fitch, S&P, and Moody's cut Ford's long-term ratings to speculative grade, with Fitch at BB+, S&P at BB-, and Moody's at Ba3, all with negative outlooks. Lower ratings raise borrowing costs and restrict Ford Credit's access to unsecured debt markets, which pushed it toward securitization. Ford Credit's managed leverage fell to 12.3 to 1 from 13.6 to 1, and the company plans further reductions.
What is the Way Forward plan and what does it mean for shareholders?
The Way Forward plan is a North American turnaround covering brand focus, innovation, clearer pricing, and cost reductions. Key actions include targeting at least $6 billion in net material cost reductions by 2010, idling 14 North American plants by 2012, and cutting 25,000 to 30,000 manufacturing jobs. Ford expects about $1 billion in special charges in 2006. Execution risk is high given union contract constraints and the company's declining market share.
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