10-Q/APeriod: Q1 FY2006

FORD MOTOR CO Quarterly Report (Amendment) for Q1 Ended Mar 31, 2006

Filed November 17, 2006For Securities:FF-PCF-PDF-PB

Summary

Ford Motor Company (F) has filed an amendment to its Quarterly Report on Form 10-Q for the period ended March 31, 2006. The primary purpose of this amendment is to restate previously issued financial statements due to an issue with the application of accounting standards related to interest rate swaps at its subsidiary, Ford Motor Credit Company (Ford Credit). The company determined that while these swaps were economically effective hedges, they did not meet the specific technical requirements for 'no ineffectiveness' under SFAS No. 133. This resulted in the recognition of changes in fair value of these swaps as derivative gains and losses, impacting reported earnings. For the first quarter of 2006, Ford reported a net loss of $1.423 billion, or $0.76 per diluted share, a significant decrease from a net income of $875 million, or $0.44 per diluted share, in the same period of 2005. This change is largely attributed to the restatement, which negatively impacted the 2006 results by $236 million after tax and the 2005 results by $337 million after tax due to the adjustment of interest rate swaps. Additionally, the company incurred substantial "special items" in the first quarter of 2006, primarily related to its "Way Forward" restructuring plan in North America, which included significant charges for employee benefits and plant idlings, totaling $2.52 billion. These factors significantly impacted the company's financial performance for the quarter.

Key Highlights

  • 1Restatement of Financial Statements: Ford is restating its financial results for the first quarters of 2006 and 2005 due to the improper accounting treatment of certain interest rate swaps, leading to a negative adjustment of $236 million for Q1 2006 and $337 million for Q1 2005.
  • 2Significant Net Loss in Q1 2006: The company reported a net loss of $1.423 billion ($0.76 per diluted share) for the first quarter of 2006, a sharp decline from a net income of $875 million ($0.44 per diluted share) in the prior year's quarter.
  • 3Major Restructuring Charges: The company incurred substantial "special items" totaling $2.52 billion in Q1 2006, primarily related to the "Way Forward" plan, including $1.75 billion for "Jobs Bank Benefits" and voluntary termination charges and $414 million for pension curtailment charges.
  • 4Automotive Sector Losses: The Automotive sector reported a significant loss before income taxes of $2.72 billion in Q1 2006, compared to income of $516 million in Q1 2005, heavily impacted by restructuring charges.
  • 5Financial Services Sector Profitability: The Financial Services sector remained profitable, reporting income before income taxes of $375 million in Q1 2006, although this was down from $506 million in Q1 2005, partly due to the absence of Hertz results and higher borrowing costs at Ford Credit.
  • 6Declining Credit Ratings: Ford and Ford Credit experienced downgrades from major credit rating agencies (S&P, Moody's, Fitch, DBRS) in early 2006, leading to increased borrowing costs and restricted access to unsecured debt markets.
  • 7Reduced Cash Position: Automotive gross cash decreased to $23.7 billion at March 31, 2006, from $25.1 billion at December 31, 2005, driven by operating and other cash outflows.

Frequently Asked Questions

Ford restated its financial results primarily due to an issue with the application of SFAS No. 133 concerning interest rate swaps at Ford Credit. While the swaps were economically effective hedges, they did not meet the strict technical criteria for 'no ineffectiveness' under Paragraph 68 of the standard, necessitating adjustments to the accounting treatment of their fair value changes.

Special items are charges and gains/losses not considered indicative of ongoing operations. In Q1 2006, these were substantial ($2.52 billion) due to Ford's 'Way Forward' restructuring plan. This included significant costs related to plant idlings, employee reductions (Jobs Bank Benefits, voluntary termination charges), and pension curtailment, which heavily impacted the company's profitability for the quarter.

The downgrades by major credit agencies led to increased borrowing costs for both Ford and Ford Credit. It also restricted their access to unsecured debt markets, forcing them to rely more heavily on securitization and other asset-backed funding sources. This could potentially impact Ford Credit's profitability and its ability to finance vehicle sales in the future.

The company revised its presentation of cash flows to separately disclose the operating, investing, and financing portions of discontinued operations. This change was made in response to SEC staff statements and aims to provide clearer reporting on the cash flow activities of divested or ceased operations.