10-Q/APeriod: Q2 FY2006

FORD MOTOR CO Quarterly Report (Amendment) for Q2 Ended Jun 30, 2006

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

Summary

Ford Motor Company (F) has filed an amended quarterly report (10-Q/A) for the period ending June 30, 2006, primarily to restate previously issued financial statements due to an issue with the accounting of interest rate swaps. The company found that while these swaps were effective economic hedges, they did not meet the specific criteria for "assumption of no ineffectiveness" under SFAS No. 133, leading to a restatement of financial results from prior periods. This restatement involves recognizing changes in the fair value of these swaps directly as derivative gains or losses, rather than offsetting them against the hedged debt. For the second quarter of 2006, Ford reported a net loss of $317 million ($0.17 per share), a significant decline from the $1.2 billion profit ($0.60 per share) in the same quarter of 2005. This downturn is attributed to substantial charges related to the "Way Forward" business improvement plan, including significant job bank benefits and voluntary termination costs, as well as pension curtailment charges. The Automotive sector experienced a substantial loss before income taxes, while the Financial Services sector saw a decrease in income. Despite the reported net loss and ongoing restructuring efforts, Ford maintained a robust cash position. The company continues to focus on cost reductions and operational efficiencies as part of its turnaround strategy, but faces significant challenges including declining market share, intense competition, and evolving regulatory environments regarding fuel economy and emissions.

Key Highlights

  • 1Restatement of prior financial statements due to non-compliance with SFAS No. 133 hedge accounting rules for interest rate swaps.
  • 2Significant net loss of $317 million for Q2 2006, compared to a profit of $1.2 billion in Q2 2005, largely due to restructuring charges and "Way Forward" plan expenses.
  • 3Automotive sector reported a substantial loss before income taxes ($1.086 billion in Q2 2006) driven by restructuring costs and operational challenges.
  • 4Financial Services sector income declined significantly in Q2 2006 ($425 million) compared to Q2 2005 ($1.692 billion), partly due to the sale of Hertz and higher borrowing costs at Ford Credit.
  • 5Ford maintained a strong gross cash balance of $23.6 billion as of June 30, 2006, indicating continued liquidity despite operational challenges.
  • 6Credit ratings for both Ford and Ford Credit were downgraded by major agencies (S&P, Fitch, Moody's, DBRS) in June/July 2006, leading to restricted access to unsecured debt markets and increased borrowing costs.
  • 7The company is undertaking a major business improvement plan ('Way Forward') involving plant idlings and workforce reductions, resulting in significant charges recognized in Q1 and Q2 2006.

Frequently Asked Questions

Ford is filing this amended report to restate its previously issued financial statements for the periods ending June 30, 2006 and 2005. The restatement is necessitated by an issue with the company's application of accounting rules (SFAS No. 133) for interest rate swaps used by Ford Motor Credit Company. While economically effective hedges, these swaps did not meet specific technical criteria for 'assumption of no ineffectiveness,' requiring changes to how their fair value is recognized in earnings.

The restatement itself resulted in a shift of $232 million pre-tax (after-tax adjustment of $147 million) in the second quarter of 2006, increasing the net loss. Ford reported a net loss of $317 million for the second quarter of 2006 after accounting for the restatement and other adjustments, compared to a previously reported loss of $254 million. This is a significant decrease from the $1.2 billion net profit reported in the second quarter of 2005.

The substantial net loss in the second quarter of 2006 is primarily driven by significant charges related to Ford's 'Way Forward' business improvement plan. These include large 'Jobs Bank Benefits' and voluntary termination charges, as well as pension curtailment charges. These restructuring and workforce reduction costs overshadowed any operational gains.

Ford Credit's income before taxes decreased significantly in Q2 2006 compared to Q2 2005, falling from $1.692 billion to $425 million. This decline is attributed to higher borrowing costs, market valuations of non-designated derivatives, lower average receivables, and increased depreciation. Despite this, Ford Credit managed to maintain a large portfolio of receivables and demonstrated improving credit loss ratios. However, credit rating downgrades for both Ford and Ford Credit in mid-2006 have led to more restricted access to unsecured debt markets and increased borrowing costs, prompting Ford Credit to increase its reliance on securitization and asset-backed funding.