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F > SEC Filings for F > Form 10-Q on 31-Jul-2014All Recent SEC Filings

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Form 10-Q for FORD MOTOR CO


31-Jul-2014

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

RESULTS OF OPERATIONS

Our second quarter and first half 2014 pre-tax results and net income were as
follows:
                                             Second Quarter                     First Half                Memo:
                                                    Better/(Worse)                   Better/(Worse)     Full Year
                                        2014             2013             2014            2013             2013
                                       (Mils.)          (Mils.)         (Mils.)         (Mils.)          (Mils.)
Income
Pre-tax results (excl. special
items)                               $   2,599     $         44        $  3,980     $         (721 )   $    8,608
Special items                             (481 )            255            (603 )              156         (1,568 )
Pre-tax results (incl. special
items)                                   2,118              299           3,377               (565 )        7,040
   (Provision for)/Benefit from
income taxes                              (803 )           (218 )        (1,073 )               23            135
Net income                               1,315               81           2,304               (542 )        7,175
      Less: Income/(Loss)
attributable to noncontrolling
interests                                    4                3               4                  2             (7 )
Net income attributable to Ford      $   1,311     $         78        $  2,300     $         (544 )   $    7,182

Net income includes certain items ("special items") that we have grouped into "Personnel and Dealer-Related Items" and "Other Items" to provide useful information to investors about the nature of the special items. The first category includes items related to our efforts to match production capacity and cost structure to market demand and changing model mix and therefore helps investors track amounts related to those activities. The second category includes items that we do not generally consider to be indicative of our ongoing operating activities, and therefore allows investors analyzing our pre-tax results to identify certain infrequent significant items that they may wish to exclude when considering the trend of ongoing operating results.

As detailed in Note 20 of the Notes to the Financial Statements, we allocate special items to a separate reconciling item, as opposed to allocating them among the operating segments and Other Automotive, reflecting the fact that management excludes these items from its review of operating segment results for purposes of measuring segment profitability and allocating resources among the segments.

The following table details Automotive sector pre-tax special items in each category:

                                                                                      Memo:
                                      Second Quarter            First Half          Full Year
                                     2014        2013        2014        2013         2013
                                    (Mils.)     (Mils.)     (Mils.)     (Mils.)      (Mils.)
Personnel and Dealer-Related Items
Separation-related actions (a)     $  (152 )   $  (442 )   $  (274 )   $  (450 )   $    (856 )
Other Items
Ford Sollers equity impairment        (329 )         -        (329 )         -             -
U.S. pension lump-sum program            -        (294 )         -        (294 )        (594 )
FCTA -- subsidiary liquidation           -           -           -           -          (103 )
Ford Romania consolidation loss          -           -           -         (15 )         (15 )
Total Other Items                     (329 )      (294 )      (329 )      (309 )        (712 )
Total Special Items                $  (481 )   $  (736 )   $  (603 )   $  (759 )   $  (1,568 )


__________


(a) Primarily related to separation costs for personnel at the Genk and U.K. facilities.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Discussion of Automotive sector, Financial Services sector, and Company results of operations below is on a pre-tax basis and excludes special items unless otherwise specifically noted. References to records by Automotive segments are since at least 2000 when we began reporting specific segment results. The chart below shows second quarter 2014 pre-tax results by sector:

[[Image Removed]]
Both the Automotive and Financial Services sectors contributed to the Company's second quarter 2014 pre-tax profit of $2.6 billion. The year-over-year improvement is more than explained by the Automotive sector; all regions improved except South America. Compared with first quarter 2014, Company pre-tax profit was $1.2 billion higher, more than explained by the Automotive sector, largely reflecting the non-recurrence of several significant adverse factors that we highlighted last quarter.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

AUTOMOTIVE SECTOR

In general, we measure year-over-year change in Automotive pre-tax operating profit for our total Automotive sector and reportable segments using the causal factors listed below, with revenue and cost variances calculated at present-year volume and mix and exchange:

Market Factors:

Volume and Mix - primarily measures profit variance from changes in wholesale volumes (at prior-year average margin per unit) driven by changes in industry volume, market share, and dealer stocks, as well as the profit variance resulting from changes in product mix, including mix among vehicle lines and mix of trim levels and options within a vehicle line

Net Pricing - primarily measures profit variance driven by changes in wholesale prices to dealers and marketing incentive programs such as rebate programs, low-rate financing offers, and special lease offers

Contribution Costs - primarily measures profit variance driven by per-unit changes in cost categories that typically vary with volume, such as material costs (including commodity and component costs), warranty expense, and freight and duty costs

Other Costs - primarily measures profit variance driven by absolute change in cost categories that typically do not have a directly proportionate relationship to production volume. These include mainly structural costs, described below, as well as all other costs, which include items such as litigation costs and costs related to our after-market parts, accessories, and service business. Structural costs include the following cost categories:

Manufacturing and Engineering - consists primarily of costs for hourly and salaried manufacturing- and engineering-related personnel, plant overhead (such as utilities and taxes), new product launch expense, prototype materials, and outside engineering services

Spending-Related - consists primarily of depreciation and amortization of our manufacturing and engineering assets, but also includes asset retirements and operating leases

Advertising and Sales Promotions - includes costs for advertising, marketing programs, brand promotions, customer mailings and promotional events, and auto shows

Administrative and Selling - includes primarily costs for salaried personnel and purchased services related to our staff activities and selling functions, as well as associated information technology costs

Pension and OPEB - consists primarily of past service pension costs and other postretirement employee benefit costs

Exchange - primarily measures profit variance driven by one or more of the following: (i) impact of gains or losses arising from transactions denominated in currencies other than the functional currency of the locations, including currency transactions, (ii) effect of remeasuring income, assets, and liabilities of foreign subsidiaries using U.S. dollars as the functional currency, or (iii) results of our foreign currency hedging activities

Net Interest and Other

Net Interest - primarily measures profit variance driven by changes in our Automotive sector's centrally-managed net interest, which consists of interest expense, interest income, fair market value adjustments on our cash equivalents and marketable securities portfolio (excluding our investment in Mazda), and other adjustments

Other - consists of fair market value adjustments to our investment in Mazda, as well as other items not included in the causal factors defined above


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Total Automotive. The following charts detail second quarter key metrics and the change in the second quarter of 2014 pre-tax results compared with the second quarter of 2013 by causal factor. Automotive operating margin is defined as Automotive pre-tax results, excluding special items and Other Automotive, divided by Automotive revenue.

[[Image Removed]]
As shown above, wholesale volume in the second quarter decreased by 1% compared with a year ago, and Automotive revenue decreased by 2%. The lower volume is more than explained by lower market share in all regions except Asia Pacific. Global industry seasonally-adjusted annual rate or SAAR is estimated at 87.3 million units, up 3% from a year ago. Our global market share is estimated at 7.5%, down two-tenths of a percentage point. Operating margin was 6.6%, up two-tenths of a percentage point, and Automotive pre-tax profit was $2.2 billion, up $66 million.

As shown in the memo below the chart, first half volume was up 2% from a year ago while Automotive revenue was down 1%. Operating margin, at 5%, was down eight-tenths of a percentage point. Total Automotive pre-tax profit, at $3.1 billion, was down $658 million.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

[[Image Removed]]
The $66 million improvement in Automotive pre-tax profit for the second quarter of 2014, compared with second quarter of 2013, is more than explained by lower costs and favorable market factors; adverse exchange, driven by South America, was a partial offset.

As shown in the memo, pre-tax profit was $1.3 billion higher than in the first quarter, more than explained by favorable volume and mix and the non-repeat of the significant adverse factors that we highlighted in the first quarter.

Total costs and expenses. In the second quarter of 2014 and 2013, total costs and expenses, including special items, for our Automotive sector were $33.8 billion and $35 billion, respectively, a difference of $1.2 billion; for first half 2014 and 2013 these were $67.3 billion and $67.5 billion, respectively, a difference of $200 million. An explanation of these changes is shown below (in billions):

                                             2014 Lower/(Higher) 2013
                                             Second              First
                                             Quarter             Half
Explanation of change:
Volume and mix, exchange, and other      $       0.5         $       0.1
Contribution costs (a)
Commodity costs (incl. hedging)                    -                   -
Material costs excluding commodity costs         0.5                 0.8
Warranty/Freight                                (0.2 )              (0.6 )
Other costs (a)
Structural costs                                (0.2 )              (0.6 )
Other                                              -                   -
Special items                                    0.6                 0.5
Total                                    $       1.2         $       0.2


_________


(a) Our key cost change elements are measured primarily at present-year exchange; in addition, costs that vary directly with volume, such as material, freight and warranty costs, are measured at present-year volume and mix. Excludes special items.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results by Automotive Segment. Details by segment of pre-tax results for the second quarter of 2014 are shown below.

[[Image Removed]]
North America and Asia Pacific were strongly profitable, with the former reporting a record quarterly profit and the latter a record second quarter profit. Middle East & Africa and Europe also were profitable, while South America reported a loss.

Other Automotive primarily reflected net interest expense. For the full year, we continue to expect net interest expense to be about $700 million.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

North America Segment. The following charts detail second quarter key metrics and the change in the second quarter of 2014 pre-tax results compared with the second quarter of 2013 by causal factor.

[[Image Removed]]

North America's second quarter pre-tax profit continued to be driven by robust industry sales, our strong product line-up, continued discipline in matching production to demand, and a lean cost structure-even as we continue to invest for future growth.

Wholesale volume and revenue declined 5% and 3%, respectively, from a year ago. The volume decrease is explained by lower market share and an unfavorable change in dealer stocks, offset partially by higher industry sales. The U.S. industry SAAR of 16.9 million units in the second quarter was 1.2 million units higher than a year ago. Our U.S. market share deteriorated 1.2 percentage points, to 15.3%, reflecting primarily a planned reduction in daily rental sales; lower F-Series share as we continue to balance share, transaction prices, and stocks as we prepare for the new F-150; and lower Edge and Focus share. Although not shown, U.S. retail market share of the retail industry was 12.9% in the second quarter, down eight-tenths of a percentage point from a year ago, explained primarily by lower F-Series, Edge, and Focus.

The decline in revenue is more than explained by the lower wholesale volume and a weaker Canadian dollar, offset partially by favorable mix. North America operating margin was 11.6%, up 1 percentage point from last year, and pre-tax profit was a record $2.4 billion, up $119 million.

As shown in the memo below the chart, all first half metrics declined from a year ago. The adverse first quarter impact of $500 million associated with changes in warranty reserves and weather-related premium costs explains the majority of the lower profit and operating margin.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

[[Image Removed]]
The second quarter 2014 improvement in pre-tax profit compared with the second quarter of 2013 is more than explained by lower costs and higher parts and accessories profit.

As shown in the memo, pre-tax profit was higher than first quarter, more than explained by favorable market factors and non-recurrence of the significant adverse factors experienced in the first quarter.

For the full year, we continue to expect North America's pre-tax profit to be lower than 2013, and operating margin to range from 8% to 9%. Our guidance includes 13 weeks of production downtime this year for the launch of the new F-150, including the summer shutdown at our Dearborn and Kansas City plants. Three weeks of downtime occurred in the first quarter, and at the Dearborn plant, eight consecutive weeks of downtime are planned beginning in late August. The Kansas City summer shutdown in July and a few individual down days in the second half make up the remainder of the downtime.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

South America Segment. The following charts detail second quarter key metrics and the change in the second quarter of 2014 pre-tax results compared with the second quarter of 2013 by causal factor.

[[Image Removed]]

In South America, we are continuing to execute our strategy of expanding our product lineup and progressively replacing legacy products with global One Ford offerings. We also are continuing to manage the effects of slowing GDP growth and lower industry volume in our larger markets, weaker currencies, high inflation, as well as policy uncertainty in some countries.

In the second quarter, wholesale volume and revenue decreased from a year ago by 22% and 30%, respectively.
The lower volume is primarily explained by an 800,000-unit decline from last year's SAAR of 6.1 million units. This includes the impact of the weakening economy in Brazil, import restrictions in Argentina, and lower production in Venezuela resulting from limited availability of U.S. dollars. South America market share, at 8.8%, was down three-tenths of a percentage point, more than explained by the model changeover of Ka and the phase out of Fiesta Classic.

The revenue decline is explained primarily by lower volume and unfavorable exchange, offset partially by higher net pricing. Operating margin was negative 14%, down significantly from a year ago, and pre-tax loss was $295 million, a deterioration of $446 million.

As shown in the memo below the chart, all first half metrics deteriorated from a year ago.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

[[Image Removed]]
South America's second quarter pre-tax results declined from a year ago. All factors were unfavorable with the exception of pricing, which did not offset fully the adverse effects of weaker currencies and high local inflation.

As shown in the memo, pre-tax results improved compared with first quarter, more than explained by favorable exchange, mainly non-repeat of adverse balance sheet exchange effects in Venezuela and Argentina.

For the full year, we now expect South America to incur a larger loss than we previously guided. Although we continue to expect higher market share and positive net pricing in the second half as we launch the all-new Ka small car, we now expect the rest of the year to be about breakeven to a loss due to lower-than-expected industry volumes and weaker currencies. The volatility in the region, including the potential of currency devaluations, adds uncertainty to our short-term projections.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Europe Segment. The following charts detail second quarter key metrics and the change in the second quarter of 2014 pre-tax results compared with the second quarter of 2013 by causal factor.

[[Image Removed]]

In Europe, we continue to implement our transformation plan focused on product, brand, and cost and remain on track to achieve profitability in 2015.

Europe's wholesale volume was about unchanged from a year ago, while revenue improved 10%. Europe 20 industry SAAR was 14.4 million units, up 700,000 units from a year ago. This was offset partially by industry declines in Russia and Turkey. Europe 20 market share, at 7.9%, was down two-tenths of a percentage point from a year ago, reflecting primarily a reduction in rental and fleet share, as well as adverse industry segmentation in passenger car. Although not shown, our commercial vehicle share improved in the second quarter to 10.6%, up half a percentage point from a year ago to our highest second quarter share since 1997; this was driven by our refreshed and expanded range of Transit products. Also not shown, passenger car share of the retail segment of the five major European markets was 8.3% in the second quarter, down one-tenth of a percentage point from the same period last year, more than explained by adverse industry segmentation.

The increase in revenue mainly reflects higher volume in the Europe 20 markets and favorable exchange, offset partially by unfavorable mix. Europe's operating margin was two-tenths of a percent, an improvement of 4.4 percentage points from a year ago, and pre-tax profit was $14 million, a $320 million improvement.

As shown in the memo below the chart, all first half metrics improved from a year ago.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

[[Image Removed]]
The improvement in second quarter pre-tax results is more than explained by lower costs and favorable exchange. Partial offsets include lower results and royalties from our joint ventures, primarily our Russia joint venture, along with lower parts and accessories profit. Restructuring costs were lower than a year ago, primarily due to a reserve release this quarter associated with our Cologne investment agreement and non-recurrence of a facility write-off in Genk last year.

As shown in the memo below the chart, pre-tax results improved compared with first quarter, more than explained by lower costs and favorable market factors.

We are very encouraged by Europe's first quarterly profit since 2011. This supports our unchanged full year guidance for the region, which is for results to improve compared with 2013. Consistent with the normal seasonality of sales and production, we expect our second half loss to be higher than the first half loss of $180 million. Lower second half wholesale volumes of about 100,000 units include the effect of summer shutdowns in the third quarter and year-end shutdowns in the fourth quarter. In addition, we expect higher restructuring-related costs in the second half, including the non-repeat of a reserve release, and higher launch-related costs with start of production of the all-new Mondeo and the new Focus.

With regard to Russia, the current environment is difficult, but Russia remains a large and important market. We are working with our partner in Ford Sollers to develop actions to improve our business outlook.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Middle East & Africa Segment. The following chart details second quarter key metrics.

[[Image Removed]]
Middle East & Africa, our newest business unit, was created to better serve customers and expand in this fast-growing region. We are intensifying our focus and targeting opportunities for growth in small, mid-size, and large vehicle segments.

In the second quarter, we wholesaled 49,000 vehicles in the region, 3,000 fewer units than a year ago. Revenue, at $1.1 billion, was $100 million lower. The lower volume primarily reflects lower market share, driven by increased competitive pressures on Expedition in the Middle East. The lower revenue is explained by the lower volume and unfavorable exchange. Operating margin was 2%, up nine-tenths of a percentage point from a year ago, and pre-tax profit was $23 million, up $10 million.

As shown in the memo below the chart, first half volume and revenue deteriorated from a year ago, but operating margin and pre-tax profit improved.

Our full year guidance for Middle East & Africa remains unchanged-we expect results to be about breakeven with quarterly variability driven by factors such as the timing of production, mix of vehicles, and long shipping times.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Asia Pacific Segment. The following charts detail second quarter key metrics and the change in the second quarter of 2014 pre-tax results compared with the second quarter of 2013 by causal factor.

[[Image Removed]]

Our strategy in Asia Pacific continues to be to grow aggressively with an expanding portfolio of One Ford products with manufacturing hubs in China, India, and ASEAN.

Second quarter wholesale volume was up 21% compared with a year ago, and net revenue-which excludes our China joint ventures-grew 9%. Our China wholesale volume, not shown, was up 26% in the quarter. The higher volume in the region primarily reflects higher market share and industry volume. We estimate second quarter SAAR for the region at 39.6 million units, up 2.2 million units from a year ago, explained by China. Our second quarter market share was 3.7%, four-tenths of a percentage point higher than a year ago. This was driven by China where our market share improved three-tenths of a percentage point to a record 4.6%, reflecting continued strong sales of Mondeo, Fiesta, and Kuga.

Asia Pacific's higher revenue is explained primarily by higher volume and favorable mix. Operating margin was 5.5%, up six-tenths of a percentage point from a year ago, and pre-tax profit was $159 million, up $29 million and a second quarter record.

As shown in the memo below the chart, all first half metrics improved substantially from a year earlier.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

[[Image Removed]]
Second quarter 2014 pre-tax profits improved from a year ago, more than explained by favorable volume and mix.

As shown in the memo, Asia Pacific pre-tax results declined from first quarter, more than explained by higher costs. These cost increases include higher warranty costs and continued investment in growth, including costs associated with six plants-one that opened in China during the quarter and five plants still under construction in the region.

For the full year, we continue to expect Asia Pacific to earn a higher pre-tax profit than a year ago. We expect full year results will be strong for the region, with each of third and fourth quarter results down from second quarter. Volume improvements will be more than offset by higher costs as we continue to invest for future growth, including the five plants under construction in China and India and the launch of Lincoln in China this fall.


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