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Financial Analysis of Ford Motor Company

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Netra Shetty
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Financial Analysis of Ford Motor Company - February 8th, 2011

The Ford Motor Company (NYSE: F) is an American multinational automaker based in Dearborn, Michigan, a suburb of Detroit. The automaker was founded by Henry Ford and incorporated on June 16, 1903. In addition to the Ford and Lincoln brands, Ford also owns a small stake in Mazda in Japan and Aston Martin in the UK. Ford's former UK subsidiaries Jaguar and Land Rover were sold to Tata Motors of India in March 2008. In 2010 Ford sold Volvo to Geely Automobile.[5] Ford discontinued the Mercury brand at the end of 2010.
Ford introduced methods for large-scale manufacturing of cars and large-scale management of an industrial workforce using elaborately engineered manufacturing sequences typified by moving assembly lines. Henry Ford's methods came to be known around the world as Fordism by 1914.
Ford is the second largest automaker in the U.S. and the fifth-largest in the world based on annual vehicle sales, after having been passed by the Hyundai Kia Automotive Group in 2010.[6] At the end of 2010, Ford was the fifth largest automaker in Europe.[7] Ford is the eighth-ranked overall American-based company in the 2010 Fortune 500 list, based on global revenues in 2009 of $118.3 billion.[8] In 2008, Ford produced 5.532 million automobiles[9] and employed about 213,000 employees at around 90 plants and facilities worldwide. During the automotive crisis, Ford's worldwide unit volume dropped to 4.817 million in 2009. In 2010, Ford earned a net profit of $6.6 billion and reduced its debt from $33.6 billion to $14.5 billion lowering interest payments by $1 billion following its 2009 net profit of $2.7 billion.[10][11] Starting in 2007, Ford received more initial quality survey awards from J. D. Power and Associates than any other automaker. Five of Ford's vehicles ranked at the top of their categories[12] and fourteen vehicles ranked in the top three.

Ford Motor Company (NYSE:F) is the world's fourth largest automotive manufacturer by production volume. The company sells vehicles under the Ford, Mercury (discontinued), Lincoln, and Volvo (to be sold) brands.

Since the mid-1990s, Ford was steadily losing market share in the US car market, from 25% in FY1995 to 5.5% in FY2009 but has been gaining since then.[1][2] At the same time, Ford's European operations have increased share by producing many critically acclaimed vehicles well known for quality.[3][4] This difference between Ford's domestic and international operations is a result of costly US manufacturing facilities caused by high wages and expensive healthcare and retirement obligations for union labor. Therefore, improving operational efficiency and developing a more fuel efficient product offering are the centerpieces of Ford's turnaround plan. For example, Ford has cut 40,000 jobs in the past three years and closed seven factories in the past five years. [5][6] Meanwhile the company has unveiled plans to bring six of its fuel efficient models (average fuel economy of over 30 mpg) currently sold in Europe to the U.S. market.[7] In addition to answering demand for smaller cars in the short-term, Ford hopes that offering the same lineup of automobiles in all of its international markets will provide considerable economies of scale in the long-term.


Ford has been restructuring Volvo and separating its operations to run on a stand-alone basis. Ford started discussions on the sale of Volvo in the first quarter of FY2009, and in March 30, 2010, Ford confirmed that it had sold its Volvo unit to Chinese automaker Geely Automobile Holdings Ltd. for $1.8 billion, $1.6 billion in cash and another $200 million note.[8] Ford expects the transaction will be complete by third quarter FY2010, when regulatory applications have been settled.

Business Overview



Dollar figures in billions[9]
Business and Financial Metrics
Ford makes money by selling and financing motor vehicles on six continents. At the end of FY2009, Ford had about 198,000 employees, down from 213,000 at the end of FY2008).[10] Ford bought several foreign luxury auto brands during the 1990s, but as the company's financial position became more tenuous, most of these have been sold off in order to focus on the core brands of Ford, Lincoln, and Mercury. Although Ford is a large global enterprise, the company has until recently made little effort to capitalize on potential economies of scale achievable with its size, meaning that Ford produced completely distinct cars for Europe, the United States, and the developing world. As the developing world has grown wealthier and higher energy prices have universally increased demand for better fuel economy, its current strategy seeks to produce fewer automobile models that can be sold across the globe with few modifications: coined 'world cars.' Ford's first world car is the new Ford Fiesta, which was engineered by Ford of Europe, but will eventually be produced and sold in the US and China.[11] Ford's future plans call for the development of many more world cars, with the idea of creating a similar vehicle offering in all of its markets worldwide.[12]

Ford has also been successful in drastically improving the quality and reliability of its cars. These improvements meant that by early 2009 Ford exceeded Honda in initial quality rankings and in a statistical dead heat with Toyota.[13] Not only do such improvements make cars more attractive to consumers, but they have also reduced Ford's warranty costs by $127 million in FY2009.[14]]] On January 11, 2010, Fitch Ratings announced that it has upgraded Ford from CCC to B-, in lieu of a positive outlook for FY2010, such as Fitch's expectation that Ford will turn a positive cashflow in FY2010.[15]

Region FY2009 worldwide wholesale unit volumes by automotive segment (in thousands)
North America 1,959
South America 443
Europe 1,568
Ford Asia Pacific and Africa 523
Volvo 324
Jaguar, Land Rover, and Aston Martin 0
Total 4,817
[16]
Ford Motor Credit
Ford also makes money by offering consumer loans and leases to car buyers, as well as business loans and lines of credit, through its financial services division Ford Motor Credit Company. This division arranges automobile financing in 36 countries worldwide through a network of over 12,500 Auto Dealerships.[17] Ford Credit is currently in the process of shrinking its portfolio and loan volume due to the drop in auto sales and the sale of Jaguar and Land Rover.


Subsidiaries
In addition to the Ford, Lincoln, and Mercury brands, Ford currently owns Volvo and one-third of Mazda. While Ford previously owned several other marques, these have all been sold off to help fund Ford's ongoing restructuring plans. Ford confirmed in late March 2010 to sell Volvo to China's Geely Automotive, and plans to complete the transaction by third quarter FY2010.[18] This figure is drastically down from Ford's hopes to sell Volvo for around $6 billion, close to its purchase price for $6.4 billion in 1999.[19]



U.S. Retail Market Share for the Big Six Automakers. Note that while most automakers faced decreasing market share in FY2009 compared to FY2008, Ford's market share increased tremendously[20]
February 2010 Sales Release Summary
For the first time in 12 years, Ford beat General Motors' monthly sales when it posted a 43% jump in vehicle sales of 142,285 vehicles.[21] This figure compares with GM's February vehicle sales of 141,951 vehicles.[22] Ford has been able to secure its position as one of the few U.S. automakers that has refused to declare bankruptcy and ask for government aid. Further, the recent Toyota recall crisis has helped Ford steal market share. For example, Toyota's sales for February 2010 fell 8.7%.[23]

Ford was further helped by its lineup of new products. For example, more than 50% of reservations to purchase the new Ford Fiesta came from customers who did not previously own a Ford vehicle.[24] This figure gives further evidence to Ford's position to move into light-duty vehicles, which has been able to post year-over-year increases on all light-duty models except the Crown Victoria. Ford's light-vehicle sales amounted to 142,006 vehicles, compared to 99,050 vehicles in February 2009.[25] Ford, Lincoln and Mercury cars, all under the Ford Company, took the lead when it climbed 54% while Ford's sport-utility vehicles grew at 39%.[26] Truck sales were lower at 36%.[27] Overall in regards to the industry, U.S. sales hit an annualized rate of about 10.4 million vehicles, down from the January 2010 pace of 10.8 million but much better than 9.5 million seen one year ago during February 2009.[28]

FY2010 Q2 Earnings Summary
Ford posted $2.6 billion profit in the second quarter, a jump of 13% compared to same reporting quarter in FY2009.[29] This quarter marks the fifth consecutive quarter of gains for Ford, which also was able to avoid bailouts that the other two Detroit automakers, GM and Chrysler, had to undergo.

Total revenue for the second quarter was $31.3 billion, which was $4.5 billion higher from second quarter FY2009, and higher than the $29.8 billion analyst estimate figure. Further, Ford was able to repay $7 billion of automotive debt throughout the quarter, which allowed it to save $470 million in annual interest.[30] Ford was also able to ship 44% more cars and trucks in its domestic market during the second quarter.[31] All of these signals point that CEO ALan Mulally's five-year turnaround plan is working, and is pointing toward a positive growth and sustainability for Ford.

FY2010 Q3 Earnings Summary
Ford posted a net income of $1.69 billion profit for the third reporting quarter of FY2010. CEO Alan Mulally was able to revive Ford by improving quality and expanding offerings of the brand. So far, Ford is the only major US automaker to avoid bankruptcy and has become able to steal 15.1% of US light-vehicle sales for this quarter, up from 13% two years ago.[32] However, Ford's third quarter sales fell 4.3% to $29 billion as the company boosted N. American production 16% to 570,000 cars and trucks.[33] Ford hopes to pay off $10.8 billion of its debt using this record income for the third quarter as new models such as the Ford Fiesta continue to sell at high prices such that by year end, Ford hopes to have cash equal to all liabilities.[34]

FY2010 Q4 Earnings Summary
Ford reported fourth quarter earnings of $190 million, or $0.05 EPS, a decrease of $696 million from same period last year.[35] The change is due to a $960 million charge for its completion of debt-conversion offers during the quarter which cut Ford's debt.[36] This, however, is the third consecutive profitable quarters in 2010, as Ford was able to outsell rival Toyota nearly every month throughout 2010, thereby retaking the #2 spot in the US sales for the year.[37] Ford also posted revenues of $32.5 billion for the quarter, but costs increased over $1 billion compared to the third quarter. As U.S. vehicle sales are expected to improve in 2011 as the economy continues to improve, Ford plans to benefit more than most from the recovery, given it was the only U.S. based automaker to avoid bankruptcy reorganization. To insure this, Ford plans to revamp its Lincoln brand to better compete with luxury brands such as Lexus and BMW.[38]

Key Trends and Forces

As Political Pressures for a Greener Economy Intensify, the Future of Ford's Main Sales are Centered on Fuel-Efficient Vehicles
Traditionally, Ford's most profitable vehicles have been large SUVs and pickup trucks. However, volatile oil prices and political pressures for more fuel-efficient cars have taken a toll on the market for these larger vehicles. As a quick fix, Ford announced plans to retool three manufacturing facilities formerly used to produce trucks to instead make six of its more fuel efficient european models in the US (such as the Mondeo and European version of the Focus, both of which are far more efficient than Ford's current American offerings).[39] This offers the advantage of quickly bringing highly demanded fuel efficient cars to the U.S. market without having to invest the money and time to create an entirely new automobile.[40] In the longer-term, the company intends for all of its vehicles to be the leader (or co-leader) for fuel economy in any given car category.[41] As part of this plan, all of Ford's engines will be redesigned or updated by 2010, efficiency enhancing direct injection turbochargers will be made an option on all vehicles, four hybrids will go on sale for 2009, and research and development spending on cars and crossovers will be increased from 1/2 to 2/3 of total development spending.[42] The 2010 Ford Fusion Hybrid, for example, has been ranked the best affordable midsize car by US News and World Report, considered to be a better drive than the Prius and with better initial quality than the Camry or Accord.[43] The company is also embracing lower tech solutions such as low resistance tires and 6-speed automatic transmissions that improve fuel efficiency over transmissions with fewer gears. These 6-speed transmissions allow the engine to rev at more efficient levels and improve fuel efficiency by 4-6% over the 4 and 5 speed transmissions currently installed on most Ford vehicles.[44] Ford hopes to build 98% of its vehicles with six-speed transmissions by 2012.

The beginnings of this massive adjustment can be seen with the 2009 Ford Focus, which has better fuel economy than the Honda Fit or Nissan Versa, and the 2009 Ford Escape, which gets better mileage than either the Toyota Rav4 or Honda CRV.[45] Yet as the development and production of a new car costs billions of dollars and several years to implement, Ford's efficiency campaign is both costly in itself and difficult to reverse once implemented, especially since Ford has practically exhausted its ability to borrow or sell additional assets to raise money. For example, in January 2010, Ford announced that it would invest an additional $450 million in its electric vehicle plan, in hopes of building a hybrid and plug-in hybrid vehicle by 2012.[46] This is consistent with Ford's $550 million investment to transform its Michigan Assembly Plant into a greener plant that would build the Focus and Focus Electric.[47] These investments are planned to create approximately 1,000 new jobs related to Ford's future electric vehicles, which includes battery pack assembly. Therefore, if Ford's aggressive bet on a shift to smaller cars proves wrong, or is executed poorly, the long-term viability of the company will be in serious question.


Ford Plans to Expand into Emerging Markets by Designing "One-Fit-All" Vehicles
Ford has historically maintained a heavy North American focus, claiming that higher income U.S. consumers buy more often and tend to buy upscale. However, North America's once-significant lead on international unit sales has all but disappeared and more importantly, growth in cars sales in the BRIC countries continues growing quickly.

How Ford manages to take advantage of this trend will be decisive to the company's long term growth. As discussed above, Ford's current international plan is the "One Ford" campaign, which seeks to save production and design costs by producing a single fleet of vehicles for all markets worldwide. The first fruit of this scheme is the new Ford Fiesta, which was developed by Ford Europe but will be sold in all Ford's major markets, and Ford of Europe's iconic Ford Transit van, which will be introduced in Asia and the US in 2009.[48] Whether Ford will be able to successfully use a single product line to both cut costs and grow sales worldwide remains to be seen.

Ford Continues to Rely on Generous Incentives and Credit as Incentives for Vehicle Purchase
Since the late 1990s Ford began to offer a number of generous and profit eroding incentives such as interest-free auto loans, "employee pricing," rebates, along with others. Additionally, the frothy real estate market allowed individuals to easily use a home equity loan to pay for an automobile- for example, nearly 30% of California car buyers borrowed against the value of their home to purchase a new car.[49] While these conditions temporarily supported sales, the economic downturn in the US and Western Europe has still hit Ford's sales and resulted in an increase in loan delinquencies and repossessions. These repossessions have hit Ford Credit especially hard because demand for off-lease and repossessed larger vehicles, that make up the majority of Ford Credit's portfolio, has been enormously reduced due to high gas prices.

Although major automakers such as Chrysler and General Motors (GM) have responded by partially or totally curtailing leasing, Ford claims that vehicle leasing will continue to be part of its business plan.[50] At the same time, Ford continues to offer greater incentives through 2008 in response to the difficult sales environment.[51] Although the continued use of generous incentives may be a necessary stop gap measure, to be profitable in the long term Ford will need to stop relying on incentives to spur demand, and instead gain buyers through the quality and appeal of its products.

Despite Refusing Government Relief, Ford Comes Out Stronger and as Lean as its Bankrupt Competitors
While both Chrysler and General Motors (GMGMQ) snapped up government relief from the Troubled Assets Relief Program (TARP) in 2008 and 2009, Ford refused to declare bankruptcy nor take government funds. As a result, its share prices plunged roughly 80% throughout 2008-2009. Since the market trough in March 2009, Ford has emerged leaner and stronger than ever before.

Ford's main advantage was that it was able to take the lenient political and economic situation meant for the bankrupt US automakers, but under a non-bankrupt and non-government influenced condition. As a result, Ford was able to "slash capacity, renegotiate healthcare, divest non-core brands, cut debt, and preserve valuable tax assets", all items that were easier to do with the US government and United Auto Workers more accepting to preserving the company rather than dealing with another bankrupt automaker.[52]

Coming out of the TARP era, Ford now has transformed itself into a concentrated and highly levered bet on the recovery of US light vehicles. Ford has realized that the future of US automobiles will not be the gas-guzzling vehicles that were sported by such automakers as Hummer for GM. Rather, Ford has positioned itself to take on upcoming government challenges of increasing MPG and market desire for smaller vehicles.[53] However, other international brands, especially Honda Motor Company (HMC) and Toyota Motor (TM) have had a head start, as they did not suffer the many structural problems that the Big Three Auto Woes dealt with in the past years. Further, smaller cars may not only reduce emissions but also reduce profits; both Western Europe and Japan, two markets that desire compact and eco-friendly vehicles, are consistently one of the least profitable geographic segments for automakers. Though Ford has weathered the storm, it will continue to face greater challenges coming from the changing US market and stronger foreign competitors.

Competition

Ford continues to lose market share in the U.S., but considers this loss acceptable as it attempts to return the company to profitability, trying to become a smaller, more flexible auto company than it has traditionally been.
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