Ford Motor Company and Subsidiaries
-----------------------------------
HIGHLIGHTS
Fourth Quarter Full Year
----------------------- -------------------------
1998 1997 1998 1997
------- ------- -------- --------
(unaudited)
Worldwide vehicle unit sales of
cars and trucks (in thousands)
- North America 1,197 1,118 4,370 4,432
- Outside North America 617 673 2,453 2,515
----- ----- ----- -----
Total 1,814 1,791 6,823 6,947
===== ===== ===== =====
Sales and revenues (in millions)
- Automotive $32,204 $31,897 $119,083 $122,935
- Financial Services 5,699 8,055 25,333 30,692
------- ------- -------- --------
Total $37,903 $39,952 $144,416 $153,627
======= ======= ======== ========
Net income (in millions)
- Automotive $ 820 $ 1,341 $ 4,752 $ 4,714
- Financial Services (excl. The Associates) 223 231 1,187 1,374
------- ------- -------- --------
Subtotal 1,043 1,572 5,939 6,088
- The Associates - 224 177 832
- Gain on spin-off of The Associates - - 15,955 -
------- ------- -------- --------
Total $ 1,043 $ 1,796 $ 22,071 $ 6,920
======= ======= ======== ========
Capital expenditures (in millions)
- Automotive $ 2,445 $ 2,389 $ 8,113 $ 8,142
- Financial Services 106 162 504 575
------- ------- -------- --------
Total $ 2,551 $ 2,551 $ 8,617 $ 8,717
======= ======= ======== ========
Automotive capital expenditures as a
percentage of sales 7.6% 7.5% 6.8% 6.6%
Stockholders' equity at December 31
- Total (in millions) $23,409 $30,734 $ 23,409 $ 30,734
- After-tax return on Common and
Class B stockholders' equity 17.8% 24.1% 25.4% 24.4%
Automotive net cash at December 31
(in millions)
- Cash and marketable securities $23,805 $20,835 $ 23,805 $ 20,835
- Debt 9,834 8,176 9,834 8,176
------- ------- -------- --------
Automotive net cash $13,971 $12,659 $ 13,971 $ 12,659
======= ======= ======== ========
After-tax return on sales
- North American Automotive 4.5% 5.9% 5.3% 5.1%
- Total Automotive 2.6% 4.2% 4.0% 3.9%
Shares of Common and Class B Stock
(in millions)
- Average number outstanding 1,210 1,201 1,211 1,195
- Number outstanding at December 31 1,209 1,202 1,209 1,202
Common Stock price (per share)
(adjusted to reflect The Associates
spin-off)
- High $59-7/8 $33-9/16 $61-7/16 $33-9/16
- Low 38-13/16 27-23/32 28-15/32 20-3/64
AMOUNTS PER SHARE OF COMMON AND
CLASS B STOCK AFTER PREFERRED
STOCK DIVIDENDS
Income assuming dilution
- Automotive $ 0.66 $ 1.08 $ 3.76 $ 3.82
- Financial Services (excl. The Associates) 0.18 0.19 0.96 1.12
------- ------- ------- --------
Subtotal 0.84 1.27 4.72 4.94
- The Associates - 0.18 0.14 0.68
- Gain on spin-off of The Associates - - 12.90 -
------- -------- ------- --------
Total $ 0.84 $ 1.45 $ 17.76 $ 5.62
======= ======= ======= ========
Cash dividends $ 0.46 $ 0.42 $ 1.72 $ 1.645
FS-1
Ford Motor Company and Subsidiaries
VEHICLE UNIT SALES
------------------
For the Periods Ended December 31, 1998 and 1997
(in thousands)
Fourth Quarter Full Year
---------------------- ----------------------
1998 1997 1998 1997
------ ------ ------ ------
(unaudited) (unaudited)
North America
United States
Cars 428 409 1,563 1,614
Trucks 654 578 2,425 2,402
----- ----- ----- -----
Total United States 1,082 987 3,988 4,016
Canada 87 91 279 319
Mexico 28 40 103 97
----- ----- ----- -----
Total North America 1,197 1,118 4,370 4,432
Europe
Britain 102 124 498 466
Germany 143 137 444 460
Italy 56 70 205 248
France 54 41 171 153
Spain 46 43 155 155
Other 95 91 377 318
----- ----- ----- -----
Total Europe 496 506 1,850 1,800
Other international
Brazil 34 49 178 214
Australia 35 31 133 132
Argentina 16 35 97 147
Taiwan 12 17 77 79
Japan 5 10 25 40
Other 19 25 93 103
----- ----- ----- -----
Total other international 121 167 603 715
----- ----- ----- -----
Total worldwide vehicle unit sales 1,814 1,791 6,823 6,947
===== ===== ===== =====
Vehicle unit sales are reported worldwide on a "where sold" basis and include
sales of all Ford-badged units, as well as units manufactured by Ford and sold
to other manufacturers.
Prior periods restated to correct reported unit sales.
FS-2
Ford Motor Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
For the Years Ended December 31, 1998, 1997 and 1996
(in millions, except amounts per share)
1998 1997 1996
--------- --------- ---------
AUTOMOTIVE
Sales (Note 1) $119,083 $122,935 $118,023
Costs and expenses (Note 1 and 15):
Costs of sales 104,782 108,907 108,882
Selling, administrative and other expenses 7,616 7,082 6,625
-------- -------- --------
Total costs and expenses 112,398 115,989 115,507
Operating income 6,685 6,946 2,516
Interest income 1,331 1,116 841
Interest expense 829 788 695
-------- -------- --------
Net interest income 502 328 146
Equity in net loss of affiliated companies (Note 1) (38) (88) (6)
Net expense from transactions with
Financial Services (Note 1) (191) (104) (85)
-------- -------- --------
Income before income taxes - Automotive 6,958 7,082 2,571
FINANCIAL SERVICES
Revenues (Note 1) 25,333 30,692 28,968
Costs and expenses (Note 1):
Interest expense 8,036 9,712 9,704
Depreciation 8,589 7,645 6,875
Operating and other expenses 4,618 6,621 6,217
Provision for credit and insurance losses 1,798 3,230 2,564
Asset write-downs and dispositions (Note 15) - - 121
-------- -------- --------
Total costs and expenses 23,041 27,208 25,481
Net revenue from transactions with Automotive (Note 1) 191 104 85
Gain on spin-off of The Associates (Note 15) 15,955 - -
Gain on sale of Common Stock of a subsidiary (Note 15) - 269 650
-------- -------- --------
Income before income taxes - Financial Services 18,438 3,857 4,222
-------- -------- --------
TOTAL COMPANY
Income before income taxes 25,396 10,939 6,793
Provision for income taxes (Note 6) 3,176 3,741 2,166
-------- -------- --------
Income before minority interests 22,220 7,198 4,627
Minority interests in net income of subsidiaries 149 278 181
-------- -------- --------
Net income $ 22,071 $ 6,920 $ 4,446
======== ======== ========
Income attributable to Common and Class B Stock
after preferred stock dividends (Note 1) $ 21,964 $ 6,866 $ 4,381
Average number of shares of Common and Class B
Stock outstanding (Note 1) 1,211 1,195 1,179
AMOUNTS PER SHARE OF COMMON AND CLASS B STOCK (Note 1)
Basic income $ 18.17 $ 5.75 $ 3.73
Diluted income $ 17.76 $ 5.62 $ 3.64
Cash dividends $ 1.72 $ 1.645 $ 1.47
The accompanying notes are part of the financial statements.
FS-3
Ford Motor Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
--------------------------
(in millions)
December 31, December 31,
1998 1997
------------ ------------
ASSETS
Automotive
Cash and cash equivalents $ 3,685 $ 6,316
Marketable securities (Note 2) 20,120 14,519
-------- --------
Total cash and marketable securities 23,805 20,835
Receivables 2,604 3,097
Inventories (Note 4) 5,656 5,468
Deferred income taxes 3,239 3,249
Other current assets (Note 1) 3,405 3,782
Net current receivable from Financial Services (Note 1) 0 416
-------- --------
Total current assets 38,709 36,847
Equity in net assets of affiliated companies (Note 1) 2,401 1,951
Net property (Note 5) 37,320 34,594
Deferred income taxes 3,175 3,712
Other assets (Notes 1 and 8) 7,139 7,975
-------- --------
Total Automotive assets 88,744 85,079
Financial Services
Cash and cash equivalents 1,151 1,618
Investments in securities (Note 2) 968 2,207
Net receivables and lease investments (Note 3) 132,567 175,417
Other assets (Note 1) 13,227 14,776
Net receivable from Automotive (Note 1) 888 0
-------- --------
Total Financial Services assets 148,801 194,018
-------- --------
Total assets $237,545 $279,097
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Automotive
Trade payables $ 13,368 $ 11,997
Other payables 2,755 2,557
Accrued liabilities (Note 7) 16,925 16,250
Income taxes payable 1,404 1,358
Debt payable within one year (Note 9) 1,121 1,129
Net current payable to Financial Services (Note 1) 70 0
-------- --------
Total current liabilities 35,643 33,291
Long-term debt (Note 9) 8,713 7,047
Other liabilities (Note 7) 30,133 28,899
Deferred income taxes 751 1,210
Net payable to Financial Services (Note 1) 818 0
-------- --------
Total Automotive liabilities 76,058 70,447
Financial Services
Payables 3,555 4,539
Debt (Note 9) 122,324 160,071
Deferred income taxes 5,488 4,347
Other liabilities and deferred income 6,034 7,865
Net payable to Automotive (Note 1) 0 416
-------- --------
Total Financial Services liabilities 137,401 177,238
Company-obligated mandatorily redeemable preferred securities of a subsidiary
trust holding solely junior subordinated debentures of the Company (Note 1) 677 678
Stockholders' equity
Capital stock (Notes 10 and 11)
Preferred Stock, par value $1.00 per share (aggregate liquidation preference
of $177 million and $637 million) * *
Common Stock, par value $1.00 per share (1,151 and 1,132 million shares issued) 1,151 1,132
Class B Stock, par value $1.00 per share (71 million shares issued) 71 71
Capital in excess of par value of stock 5,283 5,564
Accumulated other comprehensive income (1,670) (1,228)
ESOP loan and treasury stock (1,085) (39)
Earnings retained for use in business 19,659 25,234
-------- --------
Total stockholders' equity 23,409 30,734
-------- --------
Total liabilities and stockholders' equity $237,545 $279,097
======== ========
- - - - -
*Less than $500,000
The accompanying notes are part of the financial statements.
FS-4
Ford Motor Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
For the Years Ended December 31, 1998, 1997 and 1996
(in millions)
1998 1997 1996
------------------------- --------------------------- -------------------------
Financial Financial Financial
Automotive Services Automotive Services Automotive Services
------------ ----------- ------------ ---------- ------------ ----------
Cash and cash equivalents at January 1 $ 6,316 $ 1,618 $ 3,578 $ 3,689 $ 5,750 $ 2,690
Cash flows from operating activities
(Note 16) 9,622 13,478 13,984 13,650 6,576 12,681
Cash flows from investing activities
Capital expenditures (8,113) (504) (8,142) (575) (8,209) (442)
Purchase of leased assets (110) - (332) - (195) -
Acquisitions of other companies 0 (344) 0 (40) 0 (166)
Acquisitions of receivables and lease
investments - (78,863) - (117,895) - (109,087)
Collections of receivables and lease
investments - 49,303 - 86,842 - 82,398
Net acquisitions of daily rental vehicles - (1,790) - (958) - (1,759)
Net proceeds from USL Capital asset sales - - - - - 1,157
Purchases of securities (Note 16) (758) (2,102) (43) (3,067) (6) (8,020)
Sales and maturities of securities
(Note 16) 590 2,271 13 3,520 7 9,863
Proceeds from sales of receivables and
lease investments - 8,413 - 5,197 - 2,867
Net investing activity with
Financial Services 642 - 258 - 416 -
Other (468) (463) (285) (569) (586) (45)
------- -------- ------- -------- ------- --------
Net cash used in investing activities (8,217) (24,079) (8,531) (27,545) (8,573) (23,234)
Cash flows from financing activities
Cash dividends (5,348) - (2,020) - (1,800) -
Issuance of Common Stock 157 - 310 - 192 -
Issuance of Common Stock of a subsidiary
(Note 15) - - - 453 - 1,897
Purchase of Ford Treasury Stock (669) - (15) - - -
Preferred stock - Series B repurchase,
Series A redemption (420) - - - - -
Changes in short-term debt 497 7,475 (430) 6,210 151 3,474
Proceeds from issuance of other debt 2,403 21,776 1,100 22,923 1,688 22,342
Principal payments on other debt (1,434) (16,797) (668) (18,215) (1,031) (14,428)
Net financing activity with Automotive - (642) - (258) - (416)
Spin-off of The Associates cash - (508) - - - -
Other (472) (12) 16 (206) 37 (528)
------- ------- ------- -------- ------- --------
Net cash (used in)/provided by
financing activities (5,286) 11,292 (1,707) 10,907 (763) 12,341
Effect of exchange rate changes on cash (54) 146 (119) 28 (85) (116)
Net transactions with Automotive/
Financial Services 1,304 (1,304) (889) 889 673 (673)
------- -------- - ------- -------- ------- --------
Net (decrease)/increase in cash and
cash equivalents (2,631) (467) 2,738 (2,071) (2,172) 999
------- -------- ------- -------- ------- --------
Cash and cash equivalents at December 31 $ 3,685 $ 1,151 $ 6,316 $ 1,618 $ 3,578 $ 3,689
======= ======== ======= ======== ======= ========
The accompanying notes are part of the financial statements.
FS-5
Ford Motor Company and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
For the Years Ended December 31, 1996, 1997 and 1998
(in millions)
Capital Other Comprehensive Income
in Excess -------------------------------------
of Par Foreign Minimum Unrealized
Capital Value of Retained Currency Pension Holding
Stock Stock Earnings Translation Liability Gain/Loss Other Total
-------- -------- -------- ----------- --------- ---------- ------- ------
YEAR ENDED DECEMBER 31, 1996
----------------------------
Balance at beginning of year $1,160 $5,105 $17,688 $ 482 $ (108) $220 $ - $24,547
Comprehensive income
Net income 4,446 4,446
Foreign currency translation (408) (408)
Minimum pension liability
(net of tax benefit of $74) (159) (159)
Net unrealized holding loss,
(net of tax benefit of $26) (56) (56)
-------
Comprehensive income 3,823
Common stock issued for Series A
Preferred Stock conversion,
employee benefit plan and other 29 163 192
Cash dividends (1,800) (1,800)
------ ------ ------- ------- ------ ---- ------- -------
Balance at end of year $1,189 $5,268 $20,334 $ 74 $ (267) $164 $ - $26,762
====== ====== ======= ======= ====== ==== ======= =======
YEAR ENDED DECEMBER 31, 1997
----------------------------
Balance at beginning of year $1,189 $5,268 $20,334 $ 74 $ (267) $164 $ - $26,762
Comprehensive income
Net income 6,920 6,920
Foreign currency translation (1,038) (1,038)
Minimum pension liability
(net of tax benefit of $36) (70) (70)
Net unrealized holding loss
(net of tax benefit of $47) (91) (91)
-------
Comprehensive income 5,721
Common stock issued for Series A
Preferred Stock conversion,
employee benefit plans and other 14 296 310
Treasury stock (39) (39)
Cash dividends (2,020) (2,020)
------ ------ ------- ------- ------ ---- ------- -------
Balance at end of year $1,203 $5,564 $25,234 $ (964) $ (337) $ 73 $ (39) $30,734
====== ====== ======= ======= ====== ==== ======= =======
YEAR ENDED DECEMBER 31, 1998
----------------------------
Balance at beginning of year $1,203 $5,564 $25,234 $ (964) $ (337) $ 73 $ (39) $30,734
Comprehensive income
Net income (excluding gain on 5,073
spin-off of The Associates) 6,116 6,116
Gain on Associates spin-off 15,955 15,955
Foreign currency translation (53) (53)
Minimum pension liability
(net of tax benefit of $184) (361) (361)
Net unrealized holding loss
(net of tax benefit of $3) (6) (6)
Reclassification adjustments
for net gains realized in
net income (net of tax of $11) (22) (22)
------
Comprehensive income 21,629
Common stock issued for Series A
Preferred Stock conversion,
employee benefit plans and other 19 139 158
Preferred stock-Series B
repurchase and Series A redemption (420) (420)
ESOP loan and treasury stock (1,046) (1,046)
Associates spin-off to Ford Common
stockholders (22,298) (22,298)
Cash dividends (5,348) (5,348)
------ ------ ------- -------- ------ ---- ------- -------
Balance at end of year $1,222 $5,283 $19,659 $ (1,017) $ (698) $ 45 $(1,085) $23,409
====== ====== ======= ======== ====== ==== ======= =======
The accompanying notes are part of the financial statements.
FS-6
Ford Motor Company and Subsidiaries
Notes to Financial Statements
NOTE 1. Accounting Policies
----------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include all significant majority-owned
subsidiaries and reflect the operating results, assets, liabilities and cash
flows for the company's two business sectors: Automotive and Financial Services.
The assets and liabilities of the Automotive sector are classified as current or
noncurrent, and those of the Financial Services sector are unclassified.
Affiliates that are 20% to 50% owned, principally Mazda Motor Corporation and
AutoAlliance International Inc., and subsidiaries where control is expected to
be temporary, principally investments in certain dealerships, are accounted for
on an equity basis. Use of estimates and assumptions as determined by management
is required in the preparation of consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates and assumptions. For purposes of Notes to Financial
Statements, "Ford" or "the company" means Ford Motor Company and its
majority-owned consolidated subsidiaries unless the context requires otherwise.
Certain amounts for prior periods are reclassified, if required, to conform with
present period presentations.
Structure of Operations
-----------------------
The company's sectors, Automotive and Financial Services, are managed as four
primary operating segments. A segment is defined as a component with business
activity resulting in revenue and expense that has separate financial
information evaluated regularly by the company's chief operating decision maker
in determining resource allocation and assessing performance (Note 17). The
Automotive sector is comprised of Automotive and Visteon. The Automotive segment
consists of the design, manufacture, assembly and sale of cars and trucks; the
Visteon segment consists of the design, manufacture and sale of automotive
components and systems. The Financial Services sector primarily includes two
segments, Ford Motor Credit Company and its subsidiaries ("Ford Credit") and The
Hertz Corporation and its subsidiaries ("Hertz"). The Financial Services sector
also includes less significant financial services businesses (Note 17). Ford
Credit leases and finances the purchase of cars and trucks made by Ford and
other companies. It also provides inventory and capital financing to retail car
and truck dealerships. Hertz rents cars and trucks and industrial and
construction equipment. Both Ford Credit and Hertz also have insurance
operations related to their businesses.
Intersector transactions represent principally transactions occurring in the
ordinary course of business, borrowings and related transactions between
entities in the Financial Services and Automotive sectors, and interest and
other support under special vehicle financing programs. These arrangements are
reflected in the respective business sectors. Intersegment transactions are
described in Note 17.
Revenue Recognition - Automotive Sector
---------------------------------------
Sales are recorded by the company when products are shipped to dealers and other
customers, except as described below. Estimated costs for approved sales
incentive programs normally are recognized as sales reductions at the time of
revenue recognition. Estimated costs for sales incentive programs approved
subsequent to the time that related sales were recorded are recognized when the
programs are approved.
Sales through dealers to certain daily rental companies where the daily rental
company has an option to require Ford to repurchase vehicles subject to certain
conditions, are recognized over the period of daily rental service in a manner
similar to lease accounting. The carrying value of these vehicles, included in
other current assets, was $2.1 billion at December 31, 1998, and $2.2 billion at
December 31, 1997.
FS-7
NOTE 1. Accounting Policies (continued)
----------------------------
Revenue Recognition - Financial Services Sector
-----------------------------------------------
Revenue from finance receivables is recognized over the term of the receivable
using the interest method. Certain loan origination costs are deferred and
amortized, using the interest method, over the term of the related receivable as
a reduction in financing revenue. Revenue from operating leases is recognized as
scheduled payments become due. Initial direct costs net of acquisition fees
related to leases are deferred and amortized over the term of the lease.
Agreements between the Automotive sector operations and certain Financial
Services sector operations provide for interest supplements and other support
costs to be paid by Automotive sector operations on certain financing and
leasing transactions. The Financial Services sector recognizes this revenue in
income over the period that the related receivables and leases are outstanding;
the estimated costs of interest supplements and other support costs are recorded
as sales incentives by Automotive sector operations in the same manner as sales
incentives described above.
The accrual of interest on loans is discontinued at the time a loan is
determined to be impaired. Subsequent amounts of interest collected are
recognized in income only if full recovery of the remaining principal is
expected. Other amounts collected are generally recognized first as a reduction
of principal. Any remaining amounts are treated as a recovery.
The Financial Services sector periodically sells finance receivables through
special purpose subsidiaries, retains the servicing rights and certain other
beneficial interests, and receives a servicing fee which is recognized as
collected over the remaining term of the related sold finance receivables.
Estimated gains or losses from the sale of finance receivables are recognized in
the period in which the sale occurs. In determining the gain or loss on each
qualifying sale of finance receivables, the investment in the sold receivable
pool is allocated between the portion sold and the portion retained based on
their relative fair values at the date of sale.
Other Costs
-----------
Advertising and sales promotion costs are expensed as incurred. Advertising
costs were $2.2 billion in 1998, $2.3 billion in 1997 and $2.2 billion in 1996.
Estimated costs related to product warranty are accrued at the time of sale.
Research and development costs are expensed as incurred and were $6.3 billion in
1998, $6.3 billion in 1997 and $6.8 billion in 1996.
Income Per Share of Common and Class B Stock
--------------------------------------------
Basic income per share of Common and Class B Stock is calculated by dividing the
income attributable to Common and Class B Stock by the average number of shares
of Common and Class B Stock outstanding during the applicable period, adjusted
for shares issuable under employee savings and compensation plans.
The calculation of diluted income per share of Common and Class B Stock takes
into account the effect of obligations, such as stock options, considered to be
potentially dilutive.
FS-8
NOTE 1. Accounting Policies (continued)
----------------------------
Income per share of Common and Class B Stock were as follows (in millions):
1998 1997 1996
----------------- ---------------- ------------------
Income Shares* Income Shares* Income Shares*
------- ------ ------ ------ ------ ------
Net income $22,071 1,211 $6,920 1,195 $4,446 1,179
Preferred stock dividend requirements (22) - (54) - (65) -
Premium on Series B Tender Offer** (85) - - - - -
Issuable and uncommitted ESOP shares - (2) - (1) - (4)
------- ------ ------ ------ ------ -----
Basic income and shares $21,964 1,209 $6,866 1,194 $4,381 1,175
Basic Income Per Share $ 18.17 $ 5.75 $ 3.73
----------------------
Basic income and shares $21,964 1,209 $6,866 1,194 $4,381 1,175
Net dilutive effect of options - 28 - 20 - 16
Convertible preferred stock and other (1) - 8 10 24 19
------- ------ ------ ------ ------ -----
Diluted income and shares $21,963 1,237 $6,874 1,224 $4,405 1,210
Diluted Income Per Share $ 17.76 $ 5.62 $ 3.64
------------------------
- - - - -
*Average shares outstanding
**Represents a one-time reduction of $0.07 per share of Common and Class B
Stock resulting from the premium paid to repurchase the company's Series B
Cumulative Preferred Stock.
Derivative Financial Instruments
--------------------------------
Ford has operations in over 30 countries and sells vehicles in over 200 markets,
and is exposed to a variety of market risks, including the effects of changes in
foreign currency exchange rates, interest rates and commodity prices. These
financial exposures are monitored and managed by the company as an integral part
of the company's overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the potentially
adverse effect on the company's results. The company uses derivative financial
instruments to manage the exposures to fluctuations in exchange rates, interest
rates and commodity prices. All derivative financial instruments are classified
as "held for purposes other than trading"; company policy specifically prohibits
the use of leveraged derivatives or use of any derivatives for speculative
purposes.
Ford's primary foreign currency exposures, in terms of net corporate exposure,
are in the British Pound Sterling, Japanese Yen, euro, Mexican Peso and
Brazilian Real. Agreements to manage foreign currency exposures include forward
contracts, swaps and options. The company uses these derivative instruments to
hedge assets and liabilities denominated in foreign currencies, firm commitments
and certain investments in foreign subsidiaries. Gains and losses on xxxxxx of
firm commitments are deferred and recognized with the related transactions. In
the case of xxxxxx of net investments in foreign subsidiaries, gains and losses
are recognized in other comprehensive income. All other gains and losses are
recognized in cost of sales for the Automotive sector and interest expense for
the Financial Services sector. These instruments usually mature in two years or
less for Automotive sector exposures and longer for Financial Services sector
exposures, consistent with the underlying transactions. The effect of changes in
exchange rates may not be fully offset by gains or losses on currency
derivatives, depending on the extent to which the exposures are hedged.
Interest rate swap agreements are used to manage the effects of interest rate
fluctuations by changing the interest rate characteristics of specific debt or
pools of debt to match the interest rate characteristics of corresponding
assets. These instruments mature consistent with underlying debt issues as
identified in Note 9. The differential paid or received on interest rate swaps
is recognized on an accrual basis as an adjustment to interest expense. Gains
and losses on terminated interest rate swaps are amortized and reflected in
interest expense over the remaining term of the underlying debt.
FS-9
NOTE 1. Accounting Policies (continued)
----------------------------
Ford has a commodity hedging program that uses primarily forward contracts and
options to manage the effects of changes in commodity prices on the Automotive
sector's results. The financial instruments used in this program mature in
three years or less, consistent with the related purchase commitments. Gains
and losses are recognized in cost of sales during the settlement period of the
related transactions.
Foreign Currency Translation
----------------------------
Assets and liabilities of non-U.S. subsidiaries generally are translated to U.S.
Dollars at end-of-period exchange rates. The effects of this translation for
most non-U.S. subsidiaries are reported in other comprehensive income.
Remeasurement of assets and liabilities of non-U.S. subsidiaries that use the
U.S. Dollar as their functional currency are included in income as transaction
gains and losses. Income statement elements of all non-U.S. subsidiaries are
translated to U.S. Dollars at average-period exchange rates and are recognized
as part of revenues, costs and expenses. Also included in income are gains and
losses arising from transactions denominated in a currency other than the
functional currency of the subsidiary involved. Net transaction gains and
losses, as described above, increased net income by $97 million in 1998, and
decreased net income by $164 million in 1997 and $156 million in 1996.
Impairment of Long-Lived Assets and Certain Identifiable Intangibles
--------------------------------------------------------------------
The company evaluates the carrying value of goodwill for potential impairment on
an ongoing basis. Such evaluations compare operating income before amortization
of goodwill to the amortization recorded for the operations to which the
goodwill relates. The company also periodically evaluates the carrying value of
long-lived assets and long-lived assets to be disposed of for potential
impairment. The company considers projected future operating results, cash
flows, trends and other circumstances in making such estimates and evaluations.
Goodwill
--------
Goodwill represents the excess of the purchase price over the fair value of the
net assets of acquired companies and is amortized using the straight-line method
principally over 40 years. Total goodwill included in the Automotive sector's
other assets was $2.1 billion at December 31, 1998 and $2.1 billion at
December 31, 1997. Total goodwill included in the Financial Services sector's
other assets was $743 million at December 31, 1998 and $2.7 billion at
December 31, 1997. The decrease is related to the spin-off of Associates First
Capital Corporation ("The Associates", Note 15).
Company-Obligated Mandatorily Redeemable Preferred Securities of a Subsidiary
Trust
-----------------------------------------------------------------------------
During 1995, Ford Motor Company Capital Trust I (the "Trust") issued
$632 million of its 9% Trust Originated Preferred Securities (the "Preferred
Securities") in a one-for-one exchange for 25,273,537 shares of the company's
outstanding Series B Depositary Shares (the "Depositary Shares"). Concurrent
with the exchange and the related purchase by Ford of the Trust's common
securities (the "Common Securities"), the company issued to the Trust
$651 million aggregate principal amount of its 9% Junior Subordinated Debentures
due December 2025 (the "Debentures"). The sole assets of the Trust are and will
be the Debentures. The Debentures are redeemable, in whole or in part, at the
company's option on or after December 1, 2002, at a redemption price of $25 per
Debenture plus accrued and unpaid interest. If the company redeems the
Debentures, or upon maturity of the Debentures, the Trust is required to redeem
the Preferred Securities and Common Securities at $25 per share plus accrued and
unpaid distributions.
Ford guarantees to pay in full to the holders of the Preferred Securities all
distributions and other payments on the Preferred Securities to the extent not
paid by the Trust only if and to the extent that Ford has made a payment of
interest or principal on the Debentures. This guarantee, when taken together
with Ford's obligations under the Debentures and the Indenture relating thereto
and its obligations under the Declaration of Trust of the Trust, including its
obligation to pay certain costs and expenses of the Trust, constitutes a full
and unconditional guarantee by Ford of the Trust's obligations under the
Preferred Securities.
FS-10
NOTE 2. Marketable and Other Securities
----------------------------------------
Trading securities are recorded at fair value with unrealized gains and losses
included in income. Available-for-sale securities are recorded at fair value
with net unrealized gains and losses reported, net of tax, in other
comprehensive income. Held-to-maturity securities are recorded at amortized
cost. Equity securities which do not have readily determinable fair values are
recorded at cost. The basis of cost used in determining realized gains and
losses is specific identification.
The fair value of substantially all securities is determined by quoted market
prices. The estimated fair value of securities, for which there are no quoted
market prices, is based on similar types of securities that are traded in the
market.
Expected maturities of debt securities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without penalty.
Automotive Sector
-----------------
Investments in securities at December 31 were as follows (in millions):
Memo:
Amortized Unrealized Unrealized Fair Book
Cost Gains Losses Value Value
--------- ---------- ---------- ------- -------
1998
-----
Trading securities $19,534 $83 $40 $19,577 $19,577
Available-for-sale securities - Corporate securities 543 - - 543 543
------- --- --- ------- -------
Total investments in securities $20,077 $83 $40 $20,120 $20,120
======= === === ======= =======
1997
----
Trading securities $14,114 $29 $ - $14,143 $14,143
Available-for-sale securities - Corporate securities 395 - 19 376 376
------- --- --- ------- -------
Total investments in securities $14,509 $29 $19 $14,519 $14,519
======= === === ======= =======
During 1997, $365 million of bonds issued by affiliates were reclassified from
equity in net assets of affiliated companies to available-for-sale marketable
securities; $202 million of the bonds matured in 1998. Proceeds from sales of
available-for-sale securities were $586 million in 1998 and $8 million in 1997.
In 1998, gross losses of $15 million were reported. Other comprehensive income
included net unrealized losses of $5 million in 1998 and net unrealized gains of
$28 million in 1997 on securities owned by certain unconsolidated affiliates.
The available-for-sale securities at December 31, 1998 had contractual
maturities between one and five years.
Financial Services Sector
-------------------------
Investments in securities at December 31, 1998 were as follows (in millions):
Memo:
Amortized Unrealized Unrealized Fair Book
Cost Gains Losses Value Value
--------- ---------- ---------- ----- -----
Trading securities $231 $ 3 $4 $230 $230
Available-for-sale securities
-----------------------------
Debt securities issued by the U.S.
government and agencies 153 3 - 156 156
Municipal securities 63 2 - 65 65
Debt securities issued by non-U.S. governments 25 - - 25 25
Corporate securities 192 3 2 193 193
Mortgage-backed securities 198 3 - 201 201
Equity securities 35 56 1 90 90
---- --- -- ---- ----
Total available-for-sale securities 666 67 3 730 730
Held-to-maturity securities
---------------------------
Debt securities issued by the U.S.
government and agencies 6 - - 6 6
Corporate securities 2 - - 2 2
---- --- -- ---- ----
Total held-to-maturity securities 8 - - 8 8
Total investments in securities $905 $70 $7 $968 $968
==== === == ==== ====
FS-11
NOTE 2. Marketable and Other Securities (continued)
----------------------------------------
Investments in securities at December 31, 1997 were as follows (in millions):
Memo:
Amortized Unrealized Unrealized Fair Book
Cost Gains Losses Value Value
--------- ---------- ---------- ------ ------
Trading securities $ 267 $ 4 $1 $ 270 $ 270
Available-for-sale securities
-----------------------------
Debt securities issued by the U.S.
government and agencies 385 4 1 388 388
Municipal securities 13 - - 13 13
Debt securities issued by non-U.S. governments 36 - - 36 36
Corporate securities 489 7 1 495 495
Mortgage-backed securities 837 8 1 844 844
Other debt securities 14 - - 14 14
Equity securities 53 65 2 116 116
------ --- -- ------ ------
Total available-for-sale securities 1,827 84 5 1,906 1,906
Held-to-maturity securities
---------------------------
Debt securities issued by the U.S.
government and agencies 7 - - 7 7
Corporate securities 15 - - 15 15
Other debt securities 3 - - 3 3
------ --- -- ------ ------
Total held-to-maturity securities 25 - - 25 25
Total investments in securities with
readily determinable fair value 2,119 $88 $6 $2,201 2,201
=== == ======
Equity securities not practicable to fair value 6 6
------ ------
Total investments in securities $2,125 $2,207
====== ======
The amortized cost and fair value of investments in available-for-sale
securities and held-to-maturity securities at December 31 by contractual
maturity, were as follows (in millions):
Available-for-sale Held-to-maturity
----------------------- -------------------------
Amortized Amortized
1998 Cost Fair Value Cost Fair Value
---- --------- ---------- --------- ----------
Due in one year or less $ 29 $ 29 $ 1 $ 1
Due after one year through five years 165 167 3 3
Due after five years through ten years 101 102 3 3
Due after ten years 138 141 1 1
Mortgage-backed securities 198 200 - -
Equity securities 35 91 - -
------ ------ --- ---
Total $ 666 $ 730 $ 8 $ 8
====== ====== === ===
1997
----
Due in one year or less $ 100 $ 101 $14 $14
Due after one year through five years 443 446 10 10
Due after five years through ten years 273 276 - -
Due after ten years 121 124 1 1
Mortgage-backed securities 837 843 - -
Equity securities 53 116 - -
------ ------ --- ---
Total $1,827 $1,906 $25 $25
====== ====== === ===
Proceeds from sales of available-for-sale securities were $2.1 billion in 1998,
$2.9 billion in 1997 and $8.4 billion in 1996. In 1998, gross gains of
$48 million and gross losses of $3 million were realized on those sales; gross
gains of $98 million and gross losses of $8 million were realized in 1997 and
gross gains of $43 million and gross losses of $21 million were realized in
1996.
FS-12
NOTE 3. Net Receivables and Lease Investments - Financial Services Sector
--------------------------------------------------------------------------
Receivables
-----------
Included in net receivables and lease investments at December 31 were net
finance receivables, investments in direct financing leases and investments in
operating leases. The investments in direct financing and operating leases
relate to the leasing of vehicles, various types of transportation and other
equipment, and facilities.
Net finance receivables at December 31 were as follows (in millions):
1998 1997
------- --------
Retail $60,653 $ 65,661
Wholesale 22,650 24,520
Real estate 2,507 21,065
Other finance receivables 5,533 19,482
------- --------
Total finance receivables 91,343 130,728
Allowance for credit losses (1,229) (3,021)
------- --------
Total net finance receivables 90,114 127,707
Other 63 85
------- --------
Net finance and other receivables $90,177 $127,792
======= ========
Net finance receivables subject to
fair value* $90,010 $127,595
Fair value $89,847 $130,978
- - - - -
*Excludes certain diversified and other receivables of
$167 million and $197 million at December 31, 1998 and
1997, respectively
Included in finance receivables at December 31, 1998 and 1997 were a total of
$1.5 billion and $1 billion, respectively, owed by three customers with the
largest receivable balances. Other finance receivables consisted primarily of
commercial and other collateralized loans and accrued interest. Also included in
other finance receivables at December 31, 1998 and 1997 were $3.9 billion and
$3.7 billion, respectively, of accounts receivable purchased by certain
Financial Services sector operations from Automotive sector operations. Finance
receivables that originated outside the United States are $35.6 billion and
$28.3 billion at December 31, 1998 and 1997, respectively.
Contractual maturities of total finance receivables are as follows (in
millions): 1999 - $56,480; 2000 - $17,930; 2001 - $9,369; thereafter - $7,564.
Experience indicates that a substantial portion of the portfolio generally is
repaid before the contractual maturity dates.
The fair value of most receivables was estimated by discounting future cash
flows using an estimated discount rate that reflected the credit, interest rate
and prepayment risks associated with similar types of instruments. For
receivables with short maturities, the book value approximated fair value.
The Financial Services sector has sold receivables through special purpose
subsidiaries. The servicing portfolio related to these securitized assets
amounted to $13.9 billion, $10.9 billion and $10.3 billion at December 31, 1998,
1997 and 1996, respectively. The company retains certain beneficial interests in
the sold receivables which are subject to limited recourse provisions. These
financial instruments of $1.3 billion at December 31, 1998 and $999 million at
December 31, 1997 are included in other assets.
FS-13
NOTE 3. Net Receivables and Lease Investments - Financial Services Sector
--------------------------------------------------------------------------
(continued)
Lease Investments
-----------------
Investments in direct financing leases at December 31 were as follows (in
millions):
1998 1997
------ -------
Minimum lease rentals, net
of unearned income $3,359 $ 7,874
Estimated residual values 3,720 2,923
Allowance for credit losses (80) (143)
------ -------
Net investments in direct financing leases $6,999 $10,654
====== =======
Minimum direct financing lease rentals are contractually due as follows (in
millions): 1999 - $1,506; 2000 - $1,019; 2001 - $599; 2002 - $202; 2003 - $33;
thereafter - less than $1 million.
Investments in operating leases, excluding daily rental, at December 31 were as
follows (in millions):
1998 1997
------- -------
Vehicles and other equipment, at cost $43,732 $44,705
Lease origination costs 63 65
Accumulated depreciation (8,136) (7,487)
Allowance for credit losses (268) (312)
------- -------
Net investments in operating leases $35,391 $36,971
======= =======
Minimum rentals on operating leases are contractually due as follows
(in millions): 1999 - $7,150; 2000 - $3,712; 2001 - $1,629; 2002 - $224;
2003 - $76; thereafter - $121.
Depreciation expense for assets subject to operating leases is provided
primarily on the straight-line method over the term of the lease in amounts
necessary to reduce the carrying amount of the asset to its estimated residual
value. Depreciation rates and amounts are based on assumptions as to used car
prices at lease termination and the number of vehicles that will be returned to
the company. Estimated and actual residual values are reviewed on a regular
basis to determine that depreciation amounts are appropriate. Gains and losses
upon disposal of the assets also are included in depreciation expense.
Depreciation expense was as follows: $8.4 billion in 1998, $7.4 billion in 1997
and $6.6 billion in 1996.
Credit Losses
-------------
Allowances for credit losses are estimated and established as required based on
historical experience and other factors that affect collectibility. The
allowance for estimated credit losses includes a provision for certain
non-homogeneous impaired loans. Impaired loans are measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate. Finance receivables and lease investments are charged to the allowances
for credit losses when an account is deemed to be uncollectible, taking into
consideration the financial condition of the borrower, the value of the
collateral, recourse to guarantors and other factors. Recoveries on finance
receivables and lease investments previously charged-off as uncollectible are
credited to the allowances for credit losses.
Changes in the allowances for credit losses were as follows (in millions):
1998 1997 1996
------- ------- -------
Beginning balance $ 3,476 $ 2,799 $ 2,391
Provision for credit losses 1,489 2,759 2,092
Total charge-offs and recoveries:
Charge-offs (1,640) (2,484) (2,058)
Recoveries 262 238 338
------- ------- -------
Net losses (1,378) (2,246) (1,720)
Other changes (2,010)* 164 36
------- ------- -------
Ending balance $ 1,577 $ 3,476 $ 2,799
======= ======= =======
- - - - -
*Other changes includes $1,892 million to reflect the spin-off of The Associates.
FS-14
NOTE 4. Inventories - Automotive Sector
----------------------------------------
Inventories at December 31 were as follows (in millions):
1998 1997
------ ------
Raw materials, work-in-process and supplies $2,887 $2,875
Finished products 2,769 2,593
------ ------
Total inventories $5,656 $5,468
====== ======
U.S. inventories $1,832 $1,993
Inventories are stated at the lower of cost or market. The cost of most U.S.
inventories is determined by the last-in, first-out ("LIFO") method. The cost of
the remaining inventories is determined primarily by the first-in, first-out
("FIFO") method.
If the FIFO method had been used instead of the LIFO method, inventories would
have been higher by $1.2 billion and $1.4 billion at December 31, 1998 and 1997,
respectively.
NOTE 5. Net Property, Depreciation and Amortization - Automotive Sector
------------------------------------------------------------------------
Net property at December 31 was as follows (in millions):
1998 1997
------- -------
Land $ 409 $ 393
Buildings and land improvements 9,298 8,803
Machinery, equipment and other 43,562 41,510
Construction in progress 2,774 2,377
------- -------
Total land, plant and equipment 56,043 53,083
Accumulated depreciation (26,840) (26,004)
------- -------
Net land, plant and equipment 29,203 27,079
Special tools, net of amortization 8,117 7,515
------- -------
Net property $37,320 $34,594
======= =======
Property, equipment and special tools are stated at cost, less accumulated
depreciation and amortization. Property and equipment placed in service before
January 1, 1993 are depreciated using an accelerated method that results in
accumulated depreciation of approximately two-thirds of the asset cost during
the first half of the estimated useful life of the asset. Property and equipment
placed in service after December 31, 1992 are depreciated using the
straight-line method of depreciation over the estimated useful life of the
asset. On average, buildings and land improvements are depreciated based on a
30-year life; machinery and equipment are depreciated based on a 14-year life.
Special tools are amortized using an accelerated method over periods of time
representing the estimated productive life of those tools.
Depreciation and amortization expenses were as follows (in millions):
1998 1997 1996
------ ------ ------
Depreciation $2,804 $2,759 $2,644
Amortization 2,936 3,179 3,272
------ ------ ------
Total $5,740 $5,938 $5,916
====== ====== ======
When property and equipment are retired, the general policy is to charge the
cost of those assets, reduced by net salvage proceeds, to accumulated
depreciation. Maintenance, repairs and rearrangement costs are expensed as
incurred and were $2.2 billion in 1998, $2.3 billion in 1997 and $2.3 billion in
1996. Expenditures that increase the value or productive capacity of assets are
capitalized. Preproduction costs related to new facilities are expensed as
incurred.
FS-15
NOTE 6. Income Taxes
---------------------
Income before income taxes for U.S. and non-U.S. operations, excluding equity in
net income/(loss) of affiliated companies and excluding non-taxable gains from
The Associates spin-off (1998) and IPO (1996) and Hertz IPO (1997), was as
follows (in millions):
1998 1997 1996
------ ------- ------
U.S. $8,363 $ 8,353 $5,633
Non-U.S. 1,114 2,404 516
------ ------- ------
Total income before income taxes $9,477 $10,757 $6,149
====== ======= ======
The provision for income taxes was estimated as follows (in millions):
1998 1997 1996
------ ------ -----
Currently payable
U.S. federal $1,588 $2,130 $ 655
Non-U.S. 623 830 756
State and local 40 (25) 151
------ ------ ------
Total currently payable 2,251 2,935 1,562
Deferred tax liability/(benefit)
U.S. federal 883 536 642
Non-U.S. (109) 78 (117)
State and local 151 192 79
------ ------ ------
Total deferred 925 806 604
------ ------ ------
Total provision $3,176 $3,741 $2,166
====== ====== ======
Deferred taxes are provided for earnings of non-U.S. subsidiaries which are
planned to be remitted. No provision for deferred taxes has been made on $2.1
billion of retained earnings (primarily prior to 1998) which are considered to
be indefinitely invested in the non-U.S. subsidiaries. Deferred taxes for the
undistributed earnings of non-U.S. subsidiaries are not practical to estimate.
A reconciliation of the provision for income taxes compared with the amounts at
the U.S. statutory tax rate, excluding the non-taxable gains from The Associates
spin-off (1998) and IPO (1996) and Hertz IPO (1997), is shown below:
1998 1997 1996
---- ---- ----
Tax provision at U.S. statutory rate of 35% 35% 35% 35%
Effect of:
Tax on non-U.S. income 0 Pts. 0 Pts. 2 Pts.
State and local income taxes 1 1 2
Other (2) (1) (4)
Provision for income taxes 34% 35% 35%
=== === ===
Deferred income taxes reflect the estimated tax effect of accumulated temporary
differences between assets and liabilities for financial reporting purposes and
those amounts as measured by tax laws and regulations. The components of
deferred income tax assets and liabilities at December 31 were as follows (in
millions):
1998 1997
------- -------
Deferred tax assets
-------------------
Employee benefit plans $ 6,591 $ 6,378
Dealer and customer allowances and claims 4,075 4,320
Net operating loss carryforwards 795 859
Allowance for credit losses 1,164 1,270
All other 1,717 1,697
Valuation allowances (256) (308)
------- -------
Total deferred tax assets 14,086 14,216
Deferred tax liabilities
------------------------
Leasing transactions 6,324 5,588
Depreciation and amortization
(excluding leasing transactions) 4,221 4,011
Employee benefit plans 969 997
All other 2,682 2,490
------- -------
Total deferred tax liabilities 14,196 13,086
------- -------
Net deferred tax assets/(liabilities) $ (110) $ 1,130
======= =======
FS-16
NOTE 6. Income Taxes (continued)
---------------------
Non-U.S. net operating loss carryforwards for tax purposes were $795 million at
December 31, 1998. A substantial portion of these losses has an indefinite
carryforward period; the remaining losses have expiration dates beginning in
2000. For financial statement purposes, the tax benefit of operating losses is
recognized as a deferred tax asset, subject to appropriate valuation allowances.
The company evaluates the tax benefits of operating loss carryforwards on an
ongoing basis. Such evaluations include a review of historical and projected
future operating results, the eligible carryforward period and other
circumstances.
NOTE 7. Liabilities - Automotive Sector
----------------------------------------
Current Liabilities
-------------------
Included in accrued liabilities at December 31 were the following (in millions):
1998 1997
------- -------
Dealer and customer allowances and claims $ 8,765 $ 8,059
Employee benefit plans 2,530 2,154
Deferred revenue 2,447 2,566
Salaries, wages and employer taxes 740 759
Postretirement benefits other than pensions 275 640
Other 2,168 2,072
------- -------
Total accrued liabilities $16,925 $16,250
======= =======
Noncurrent Liabilities
----------------------
Included in other liabilities at December 31 were the following (in millions):
1998 1997
------- -------
Postretirement benefits other than pensions $14,859 $15,407
Dealer and customer allowances and claims 7,401 7,049
Employee benefit plans 3,762 3,137
Unfunded pension obligation 1,528 1,009
Minority interests in net assets of subsidiaries 103 94
Other 2,480 2,203
------- -------
Total other liabilities $30,133 $28,899
======= =======
FS-17
NOTE 8. Employee Retirement Benefits
-------------------------------------
Employee Retirement Plans
-------------------------
The company has two principal retirement plans in the U.S. The Ford-UAW
Retirement Plan covers hourly employees represented by the UAW, and the General
Retirement Plan covers substantially all other Ford employees of the company in
the U.S. The hourly plan provides noncontributory benefits related to employee
service. The salaried plan provides similar noncontributory benefits and
contributory benefits related to pay and service. Other U.S. and non-U.S.
subsidiaries have separate plans that generally provide similar types of
benefits for their employees.
In general, the company's plans are funded with the main exceptions of the U.S.
defined benefit plans for executives and certain plans in Germany; in such cases
an unfunded liability is recorded.
The company's policy for funded plans is to contribute annually, at a minimum,
amounts required by applicable law, regulations and union agreements. Plan
assets consist principally of investments in stocks, and government and other
fixed income securities.
Postretirement Health Care and Life Insurance Benefits
------------------------------------------------------
The company and certain of its subsidiaries sponsor unfunded plans to provide
selected health care and life insurance benefits for retired employees. The
company's U.S. and Canadian employees may become eligible for those benefits if
they retire while working for the company; however benefits and eligibility
rules may be modified from time to time. The estimated cost for these benefits
is accrued over periods of employee service on an actuarially determined basis.
In June 1997, the company prepaid certain 1998 and 1999 hourly health benefits
by contributing $1.6 billion to a Voluntary Employees' Beneficiary Association
("VEBA") trust. In 1998, a further $1.7 billion was contributed to the VEBA to
pre-pay hourly retiree health benefits. At December 31, 1998, $2 billion of the
remaining $2.4 billion VEBA assets applied to hourly retirees.
Increasing the assumed health care cost trend rates by one percentage point is
estimated to increase the aggregate service and interest cost components of net
postretirement benefit expense for 1998 by about $200 million and the
accumulated postretirement benefit obligation at December 31, 1998 by about
$2.3 billion. A decrease of one percentage point would reduce service and
interest costs by $160 million and decrease the December 31, 1998 obligation by
$1.9 billion.
FS-18
NOTE 8. Employee Retirement Benefits (continued)
-------------------------------------
Employee Retirement Benefit Expense
-----------------------------------
The company's expense for pensions, retirement health care and life insurance
was as follows (in millions):
Pension Benefits
-------------------------------------------------
U.S. Plans Non-U.S. Plans Other Beneifts*
------------------------- ------------------- ---------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------ ------ ------ ---- ---- ---- ---- ---- ----
Costs Recognized in Income
--------------------------
Service cost $ 596 $ 551 $ 532 $354 $331 $261 $ 265 $ 242 $ 268
Interest cost 1,999 1,993 1,838 867 857 819 1,183 1,161 1,195
Expected return on plan
assets (2,747) (2,505) (2,310) (986) (931) (790) (45) - -
Amortization of:
Transition (asset)/obligation (22) (22) (21) 13 61 39 - - -
Plan amendments 729 515 599 114 92 103 (42) (44) (48)
(Gains)/losses and other 25 30 30 129 56 95 95 13 (21)
------- ------- ------- ----- ---- ---- ------- ------ ------
Net pension/postretirement
expense $ 580 $ 562 $ 668 $491 $466 $527 $1,456 $1,372 $1,394
======= ======= ======= ===== ===== ===== ======= ======= ======
Discount rate for expense 6.75% 7.25% 7.00% 6.50% 7.10% 7.60% 7.00% 7.50% 7.25%
Assumed long-term rate of
return on assets 9.00% 9.00% 9.00% 9.20% 9.20% 9.20% 6.20% - -
Initial health care cost
trend rate - - - - - - 6.60% 6.60% 9.50%
Ultimate health care cost
trend rate - - - - - - 5.00% 5.00% 5.50%
Number of years to ultimate
trend rate - - - - - - 10 10 10
- - - - -
*Postretirement health care and life insurance benefits
Pension expense in 1998 increased for U.S. and non-U.S. plans primarily as a
result of the year-to-year change in the cost of special employee separation
programs and lower discount rates, partially offset by increased return on plan
assets.
FS-19
NOTE 8. Employee Retirement Benefits (continued)
-------------------------------------
The year-end status of these plans was as follows (in millions):
Pension Benefits
------------------------------------------
U.S. Plans Non-U.S. Plans Other Benefits*
------------------ ------------------ --------------------
1998 1997 1998 1997 1998 1997
-------- ------- ------- ------- -------- --------
Change in Benefit Obligation
----------------------------
Benefit obligation at January 1 $30,923 $28,245 $13,311 $12,865 $ 17,522 $ 16,503
Service cost 596 551 354 331 265 242
Interest cost 1,999 1,993 867 857 1,183 1,161
Amendments 10 4 26 91 - -
Special programs 278 79 114 37 63 -
Net aquisitions/(sales) (493) 76 - - (130) -
Plan participant contributions 45 43 91 - - -
Benefits paid (1,869) (1,828) (660) (633) (846) (794)
Foreign exchange translation - - 182 (1,029) (22) (15)
Actuarial loss/(gain) 2,046 1,760 2,051 792 1,180 425
------- ------- ------- ------- -------- --------
Benefit obligation at December 31 $33,535 $30,923 $16,336 $13,311 $ 19,215 $ 17,522
======= ======= ======= ======= ======== ========
Change in Plan Assets
---------------------
Fair value of plan assets at January 1 $35,683 $30,933 $11,687 $10,898 $ 736 $ -
Actual return on plan assets 5,746 5,933 1,470 1,533 45 -
Company contributions 2 210 219 246 1,700 736
Special programs (95) (1) (27) - - -
Net sales (473) - - - - -
Plan participant contributions 45 43 91 - - -
Benefits paid (1,869) (1,828) (660) (633) (480) -
Foreign exchange translation - - 26 (652) - -
Other 83 393 449 295 - -
------- ------- ------- ------- -------- --------
Fair value of plan assets at December 31 $39,122 $35,683 $13,255 $11,687 $ 2,001 $ 736
======= ======= ======= ======= ======== ========
Funded Status of the Plan
-------------------------
Plan assets in excess of/(less than) $ 5,587 $ 4,760 $(3,081) $(1,624) $(17,214) $(16,786)
benefit obligations
Unamortized:
Transition (asset)/obligation (68) (87) 744 212 - -
Prior service cost 1,941 2,393 507 570 (119) (162)
Net (gains)/losses (5,704) (4,801) 650 (63) 1,900 757
------- ------- ------- ------- -------- --------
Net amount recognized $ 1,756 $ 2,265 $(1,180) $ (905) $(15,433) $(16,191)
======= ======= ======= ======= ======== ========
Amounts Recognized in the
Balance Sheet Consists of Assets/(Liabilities)
----------------------------------------------
Other non-current assets - Automotive** $ 2,314 $ 2,459 $ 1,558 $ 1,600 $ - $ -
Accrued non-current liabilities - Automotive (611) (515) (3,601) (2,749) (14,859) (15,407)
Deferred income taxes 34 39 376 120 - -
Accumulated other comprehensive income 54 63 644 274 - -
Other (35) 219 (157) (150) (574) (784)
------- ------- ------- ------- -------- --------
Net amount recognized $ 1,756 $ 2,265 $(1,180) $ (905) $(15,433) $(16,191)
======= ======= ======= ======= ======== ========
**Includes intangible asset 16 68 404 455
Pension Plans in Which Accumulated Benefit
Obligation Exceeds Plan Assets at December 31
---------------------------------------------
Projected benefit obligation $ 786 $ 795 $ 6,557 $ 5,358
Accumulated benefit obligation 689 688 6,141 5,024
Fair value of plan assets 14 76 2,820 2,631
Assumptions as of December 31
-----------------------------
Discount rate 6.25% 6.75% 5.70% 6.50% 6.50% 7.00%
Expected return on assets 9.00% 9.00% 9.30% 9.20% 6.00% 6.20%
Average rate of increase in compensation 5.20% 5.50% 5.10% 5.10% - -
Initial health care cost trend rate - - - - 7.00% 6.60%
Ultimate health care cost trend rate - - - - 5.00% 5.00%
Number of years to ultimate trend rate - - - - 9 10
- - - - -
*Postretirement health care and life insurance benefits
FS-20
NOTE 9. Debt
-------------
The fair value of debt was estimated based on quoted market prices or current
rates for similar debt with the same remaining maturities.
Automotive Sector
-----------------
Debt at December 31 was as follows (in millions):
Weighted Average
Interest Rate* Book Value
---------------- -----------------
Maturity 1998 1997 1998 1997
-------- ---- ---- ----- ------
Debt payable within one year
----------------------------
Short-term debt 9.8% 7.9% $ 1,076 $ 592
Long-term debt payable within one year 45 537
------- ------
Total debt payable within one year 1,121 1,129
Long-term debt 2000-2097 8.0% 8.5% 8,713 7,047
------- ------
Total debt $ 9,834 $8,176
======= ======
Fair value $10,809 $8,988
- - - - -
*Excludes the effect of interest rate swap agreements; change in 1998
primarily reflects short-term debt in South America.
Long-term debt at December 31, 1998 included maturities as follows (in
millions): 1999 - $45 (included in current liabilities); 2000 - $705;
2001 - $222; 2002 - $595; 2003 - $69; thereafter - $7,122.
Included in long-term debt at December 31, 1998 and 1997 were obligations of
$7,944 million and $6,864 million, respectively, with fixed interest rates, and
$769 million and $183 million, respectively, with variable interest rates
(generally based on LIBOR or other short-term rates). Obligations payable in
foreign currencies at December 31, 1998 and 1997 were $544 million and
$372 million, respectively.
Agreements to manage exposures to fluctuations in interest rates, which include
primarily interest rate swap agreements and futures contracts, did not change
the December 31, 1998 and December 31, 1997 overall weighted-average interest
rates on long-term debt or the obligations subject to variable interest rates.
Financial Services Sector
-------------------------
Debt at December 31 was as follows (in millions):
Weighted Average
Interest Rate* Book Value
------------------ -------------------
Maturity 1998 1997 1998 1997
-------- ------ ------ -------- --------
Debt payable within one year
----------------------------
Unsecured short-term debt $ 2,998 $ 3,684
Commercial paper 49,429 63,834
Other short-term debt 4,046 3,985
-------- --------
Total short-term debt 5.6% 6.0% 56,473 71,503
Long-term debt payable within one year 10,383 15,370
-------- --------
Total debt payable within one year 66,856 86,873
Long-term debt
--------------
Secured indebtedness 2000-2005 10.2% 9.3% 17 64
Unsecured senior indebtedness
Notes and bank debt 2000-2078 6.2% 6.6% 50,449 67,477
Debentures 2001-2006 4.0% 5.6% 1,661 2,313
Unamortized discount (30) (6)
-------- --------
Total unsecured senior indebtedness 52,080 69,784
Unsecured subordinated indebtedness
Notes 2000-2020 7.7% 8.5% 3,381 2,946
Debentures 7.3% 0 425
Unamortized discount (10) (21)
-------- --------
Total unsecured subordinated indebtedness 3,371 3,350
-------- --------
Total long-term debt 55,468 73,198
-------- --------
Total debt $122,324 $160,071
======== ========
Fair value $124,320 $161,872
- - - - -
*Excludes the effect of interest rate swap agreements
FS-21
NOTE 9. Debt (continued)
-------------
Financial Services Sector (continued)
-------------------------
Information concerning short-term borrowings (excluding long-term debt payable
within one year) is as follows (in millions):
1998 1997 1996
------- ------- -------
Average amount of short-term borrowings $49,099 $65,592 $62,529
Weighted-average short-term interest rates per annum
(average year) 5.7% 5.3% 5.7%
Average remaining term of commercial paper
at December 31 31 days 30 days 33 days
Long-term debt at December 31, 1998 included maturities as follows
(in millions): 1999 - $10,383; 2000 - $11,307; 2001 - $12,363; 2002 - $8,577;
2003 - $9,958; thereafter - $13,263.
Included in long-term debt at December 31, 1998 and 1997 were obligations of
$38.1 billion and $56.7 billion, respectively, with fixed interest rates and
$17.3 billion and $16.5 billion, respectively, with variable interest rates
(generally based on LIBOR or other short-term rates). Obligations payable in
foreign currencies at December 31, 1998 and 1997 were $30 billion and
$27 billion, respectively. These obligations were issued primarily to fund
non-U.S. business operations.
Outstanding commercial paper at December 31, 1998 totaled $46.2 billion at Ford
Credit and $2.3 billion at Hertz, with an average remaining maturity of 30 days
and 52 days, respectively.
Agreements to manage exposures to fluctuations in interest rates include
primarily interest rate swap agreements. At December 31, 1998, these agreements
decreased the weighted-average interest rate on long-term debt to 6%, compared
with 6.2% excluding these agreements, and effectively decreased the obligations
subject to variable interest rates to zero; the weighted-average interest rate
on short-term debt excluding these agreements did not change materially. At
December 31, 1997, these agreements decreased the weighted-average interest rate
on long-term debt to 6.5%, compared with 6.6% excluding these agreements, and
effectively decreased the obligations subject to variable rates to
$11.8 billion; the weighted-average interest rate on short-term debt excluding
these agreements did not change materially.
Support Facilities
------------------
At December 31, 1998, Ford had long-term contractually committed global credit
agreements under which $8.6 billion is available from various banks; 94% are
available through June 30, 2003. The entire $8.6 billion may be used, at Ford's
option, by any affiliate of Ford; however, any borrowing by an affiliate will be
guaranteed by Ford. Ford also has the ability to transfer on a nonguaranteed
basis $8.3 billion of such credit lines in varying portions to Ford Credit and
FCE Bank plc (formerly known as Ford Credit Europe plc). In addition, at
December 31, 1998, $628 million of contractually committed credit facilities
were available to various Automotive sector affiliates outside the U.S.
Approximately $254 million of these facilities were in use at December 31, 1998.
FS-22
NOTE 9. Debt (continued)
-------------
At December 31, 1998, the Financial Services sector had a total of $28.2 billion
of contractually committed support facilities (excluding the $8.3 billion
available under Ford's global credit agreements). Of these facilities,
$23.9 billion are contractually committed global credit agreements under which
$19.2 billion and $4.7 billion are available to Ford Credit and FCE Bank plc,
respectively, from various banks; 58% and 76%, respectively, of such facilities
are available through June 30, 2003. The entire $19.2 billion may be used, at
Ford Credit's option, by any subsidiary of Ford Credit, and the entire
$4.7 billion may be used, at FCE Bank plc's option, by any subsidiary of FCE
Bank plc. Any borrowings by such subsidiaries will be guaranteed by Ford Credit
or FCE Bank plc, as the case may be. At December 31, 1998, $131 million of the
Ford Credit global facilities were in use and $826 million of the FCE Bank plc
global facilities were in use. Other than the global credit agreements, the
remaining portion of the Financial Services sector support facilities at
December 31, 1998 consisted of $2 billion of contractually committed support
facilities available to Hertz in the U.S. and $2.3 billion of contractually
committed support facilities available to various affiliates outside the U.S.;
at December 31, 1998 approximately $1.3 billion of these facilities were in use.
Furthermore, banks provide $1.5 billion of liquidity facilities to support the
asset-backed commercial paper program of a Ford Credit sponsored special purpose
entity.
NOTE 10. Capital Stock
-----------------------
At December 31, 1998, all general voting power was vested in the holders of
Common Stock and the holders of Class B Stock, voting together without regard to
class. At that date, the holders of Common Stock were entitled to one vote per
share and, in the aggregate, had 60% of the general voting power; the holders of
Class B Stock were entitled to such number of votes per share as would give
them, in the aggregate, the remaining 40% of the general voting power, as
provided in the company's Restated Certificate of Incorporation.
The Restated Certificate of Incorporation provides that all shares of Common
Stock and Class B Stock share equally in dividends (other than dividends
declared with respect to any outstanding Preferred Stock), except that any stock
dividends are payable in shares of Common Stock to holders of that class and in
Class B Stock to holders of that class. Upon liquidation, all shares of Common
Stock and Class B Stock are entitled to share equally in the assets of the
company available for distribution to the holders of such shares.
On January 9, 1998, all outstanding shares of Series A Depositary Shares,
representing 1/1,000 of a share of Series A Cumulative Convertible Preferred
Stock, were redeemed at a price of $51.68 per Depositary Share plus an amount
equal to accrued and unpaid dividends.
Series B Depositary Shares, representing 1/2,000 of a share of Series B
Cumulative Preferred Stock, have a liquidation preference of $25 per Depositary
Share. Shares outstanding at December 31, 1998 were valued at $177 million and
numbered 7,096,688 Depositary Shares. Dividends are payable at a rate of
$2.0625 per year per Depositary Share. Series B Cumulative Preferred Stock is
not convertible into shares of Common Stock of the company. On and after
December 1, 2002, and upon satisfaction of certain conditions, the stock is
redeemable forcash at the option of Ford, in whole or in part, at a redemption
price equivalent to $25 per Depositary Share, plus an amount equal to the sum
of all accrued and unpaid dividends.
On January 22, 1998, the company commenced an offer to purchase all Depositary
Shares representing its Series B Cumulative Preferred Stock at a price of
$31.40 per Depositary Share. The offer to purchase was in effect until
February 26, 1998. Depositary Shares purchased totaled 13,229,775.
The Series B Cumulative Preferred Stock ranks (and any other outstanding
Preferred Stock of the company would rank) senior to the Common Stock and Class
B Stock in respect of dividends and liquidation rights.
FS-23
NOTE 10. Capital Stock (continued)
-----------------------
Changes to the number of shares of capital stock issued for the periods
indicated were as follows (shares in millions):
Series A Series B
Common Class B Preferred Preferred
Stock Stock Stock Stock
------- ------- --------- ---------
Issued at December 31, 1995 1,089 71 0.011 0.010
Changes:
1996 - Conversion of Series A Preferred Stock 23 (0.007)
- Employee benefit plans and other 6
1997 - Conversion of Series A Preferred Stock 4 (0.001)
- Employee benefit plans and other 10
1998 - Conversion and Redemption of Series A 8 (0.003)
Preferred Stock
- Employee benefit plans and other 11
- Repurchase of Series B Preferred Stock (0.006)
----- -- ----- -----
Net change 62 0 (0.011) (0.006)
----- -- ----- -----
Issued at December 31, 1998 1,151 71 0.000 0.004
===== == ===== =====
Authorized at December 31, 1998 3,000 265 -- Total Preferred: 30 --
NOTE 11. Stock Options
-----------------------
The company has stock options outstanding under the 1985 Stock Option Plan, the
1990 Long-Term Incentive Plan and 1998 Long-Term Incentive Plan. These Plans
were approved by the stockholders. No further grants may be made under the
1985 Plan or 1990 Plan. Grants may be made under the 1998 Plan through
April 2008. In general, options granted in 1997 under the 1990 Plan and
subsequent years under the 1998 Plan become exercisable 33% after one year from
the date of grant, 66% after two years and in full after three years. In
general, options granted under the 1985 Plan and options granted prior to
1997 under the 1990 Plan become exercisable 25% after one year from the date of
grant, 50% after two years, 75% after three years and in full after four years.
Options under the Plans expire after 10 years from the date of grant. Certain
participants were granted accompanying stock appreciation rights under the
plans which may be exercised in lieu of the related options. Under the Plans,
a stock appreciation right entitles the holder to receive, without payment, the
excess of the fair market value of the Common Stock on the date of exercise
over the option price, either in Common Stock or cash or a combination. In
addition, grants of Performance/Contingent Stock Rights were made with respect
to 1,354,627 shares in 1998, 936,300 shares in 1997, 865,100 shares in 1996. The
number of shares ultimately awarded will depend on the extent to which the
Performance Targets specified in each Right is achieved, individual performance
of the recipients and other factors, as determined by the Compensation and
Option Committee of the Board of Directors.
Under the 1998 Plan, up to 2% of Common Stock issued as of December 31 of any
year may be made available for stock options and other plan awards in the next
succeeding calendar year. That limit may be increased up to 3% in any year, with
a corresponding reduction in shares available for grants in future years. Any
unused portion of the 2% limit for any calendar year may be carried forward and
made available for Plan awards in succeeding calendar years. At
December 31, 1998, the number of unused shares carried forward aggregated to
12,966,146 shares.
FS-24
NOTE 11. Stock Options (continued)
-----------------------
Information concerning stock options is as follows (shares in millions):
1998 1997 1996
------------------ ------------------ ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares subject to option Shares Price Shares Price Shares Price
------------------------ ------ --------- ------ ---------- ------ ---------
Outstanding at beginning of period 50.0 $28.44 50.3 $26.93 48.5 $25.22
New grants (based on fair value of
Common Stock at dates of grant) 12.7 58.07 8.6 32.05 8.0 32.69
Associates adjustment* 24.8 -
Exercised** (13.7) 19.97 (8.3) 23.19 (5.2) 20.32
Surrendered upon exercise of stock
appreciation rights (2.5) 22.79 (0.4) 22.44 (0.7) 23.03
Terminated and expired (0.4) 33.58 (0.2) 30.86 (0.3) 31.14
----- ----- -----
Outstanding at end of period 70.9*** 25.67 50.0 28.44 50.3 26.93
Outstanding but not exercisable (34.9) (21.6) (21.5)
----- ----- -----
Exercisable at end of period 36.0 19.53 28.4 25.84 28.8 23.61
===== ===== =====
- - - - -
*Outstanding stock options and related exercise prices were adjusted to
preserve the intrinsic value of options as a result of The Associates
spin-off in 1998.
**Exercised at option prices ranging from $10.43 to $32.69 during
1998, $15.00 to $32.69 during 1997 and $13.42 to $29.06 during 1996.
***Included 0.7, 52.5 and 17.7 million shares under the 1985, 1990 and
1998 Plans, respectively, at option prices ranging from $10.43 to
$58.63 per share. At December 31, 1998, the weighted-average remaining
exercise period relating to the outstanding options was 7.1 years.
The estimated fair value as of date of grant of options granted in 1998,
1997 and 1996, using the Black-Scholes option-pricing model, was as follows:
1998 1997 1996
----- ----- -----
Estimated fair value per share of
options granted during the year $9.25 $5.76 $6.93
Assumptions:
Annualized dividend yield 4.1% 4.8% 4.3%
Common Stock price volatility 28.1% 22.1% 25.2%
Risk-free rate of return 5.7% 6.7% 6.2%
Expected option term (in years) 5 5 5
The company measures compensation cost using the intrinsic value method.
Accordingly, no compensation cost for stock options has been recognized. If
compensation cost had been determined based on the estimated fair value of
options granted since 1995, the company's net income and income per share would
have been reduced to the pro forma amounts indicated below:
1998 1997 1996
--------------------- ------------------- -------------------
As Pro As Pro As Pro
Reported Forma* Reported Forma* Reported Forma*
-------- ------- -------- ------ -------- ------
Net income (in millions) $22,071 $22,014 $6,920 $6,892 $4,446 $4,428
Income per share
----------------
Basic $ 18.17 $ 18.12 $ 5.75 $ 5.73 $ 3.73 $ 3.71
Diluted $ 17.76 $ 17.71 $ 5.62 $ 5.60 $ 3.64 $ 3.63
- - - - -
*The pro forma disclosures may not be representative of the effects on reported
net income and income per share for future periods because only stock options
that were granted beginning in 1995 are included in the above table. The
estimated fair value, before tax, of options granted in 1998, 1997 and 1996 was
$162 million, $48 million and $54 million, respectively.
FS-25
NOTE 12. Litigation and Claims
-------------------------------
Various legal actions, governmental investigations and proceedings and claims
are pending or may be instituted or asserted in the future against the company
and its subsidiaries, including those arising out of alleged defects in the
company's products; governmental regulations relating to safety, emissions and
fuel economy; financial services; employment-related matters; dealer, supplier
and other contractual relationships; intellectual property rights; product
warranties; and environmental matters. Certain of the pending legal actions are,
or purport to be, class actions. Some of the foregoing matters involve or may
involve compensatory, punitive, or antitrust or other treble damage claims in
very large amounts, or demands for recall campaigns, environmental remediation
programs, sanctions, or other relief which, if granted, would require very large
expenditures.
Litigation is subject to many uncertainties, and the outcome of individual
litigated matters is not predictable with assurance. Reserves have been
established by the company for certain of the matters discussed in the foregoing
paragraph where losses are deemed probable. It is reasonably possible, however,
that some of the matters discussed in the foregoing paragraph for which reserves
have not been established could be decided unfavorably to the company or the
subsidiary involved and could require the company or such subsidiary to pay
damages or make other expenditures in amounts or a range of amounts that cannot
be estimated at December 31, 1998. The company does not reasonably expect, based
on its analysis, that any adverse outcome from such matters would have a
material effect on future consolidated financial statements for a particular
year, although such an outcome is possible.
NOTE 13. Commitments and Contingencies
---------------------------------------
At December 31, 1998, the company had the following minimum rental commitments
under non-cancelable operating leases (in millions): 1999 - $413; 2000 - $336;
2001 - $272; 2002 - $182; 2003 - $113; thereafter - $187. These amounts include
rental commitments related to the sale and leaseback of certain Automotive
sector machinery and equipment.
Ford in the U.S. and Ford of Canada have entered into agreements with banks to
provide credit card programs that offer rebates that can be applied against the
purchase or lease of Ford vehicles. The maximum amount of rebates available to
qualified cardholders at December 31, 1998 and 1997 was $1.6 billion and
$1.8 billion, respectively. The company has provided for the estimated net cost
of these programs as a sales incentive based on the estimated number of
participants who ultimately will purchase vehicles. The U.S. program was
discontinued December 31, 1997 and the Canadian program was discontinued
May 31, 1998; rebates for the U.S. program earned prior to program
discontinuance will be valid for up to five years following the calendar year
in which earned, subject to certain restrictions.
NOTE 14. Financial Instruments
-------------------------------
Estimated fair value amounts have been determined using available market
information and various valuation methods depending on the type of instrument.
In evaluating the fair value information, considerable judgment is required to
interpret the market data used to develop the estimates. The use of different
market assumptions and/or different valuation techniques may have a material
effect on the estimated fair value amounts. Accordingly, the estimates of fair
value presented herein may not be indicative of the amounts that could be
realized in a current market exchange.
FS-26
NOTE 14. Financial Instruments (continued)
-------------------------------
Balance Sheet Financial Instruments
-----------------------------------
Information about specific valuation techniques and estimated fair values is
provided throughout the Notes to Financial Statements. Book value and estimated
fair value amounts at December 31 were as follows (in millions):
1998 1997
----------------------- -----------------------
Book Fair Book Fair Fair Value
Value Value Value Value Reference
-------- -------- -------- ------- ----------
Automotive Sector
-----------------
Marketable securities $ 20,120 $ 20,120 $ 14,519 $ 14,519 Note 2
Debt 9,834 10,809 8,176 8,988 Note 9
Financial Services Sector
-------------------------
Marketable securities $ 968 $ 968 $ 2,201 $ 2,201 Note 2
Receivables 90,010 89,847 127,595 130,978 Note 3
Debt 122,324 124,320 160,071 161,872 Note 9
Foreign Currency and Interest Rate Instruments
----------------------------------------------
The fair value of foreign currency and interest rate instruments was estimated
using current market prices provided by outside quotation services. The
estimated fair value, notional amount and deferred loss at December 31 were as
follows (in millions):
Fair Value
------------------
1998 1997
------ ------
Foreign currency instruments
Assets $631 $ 289
Liabilities 615 1,207
Interest rate instruments
Assets 944 548
Liabilities 251 182
The notional amount represents the contract amount, not the amount at risk. The
notional amount for foreign currency instruments was $33.1 billion at December
31, 1998, and $31 billion at December 31, 1997. The deferred loss for foreign
currency instruments was $26 million at December 31, 1998 and $63 million at
December 31, 1997. These deferred losses are offset by unrecognized gains on the
underlying transactions or commitments. The notional amount for interest rate
instruments was $97.5 billion at December 31, 1998, and $90.4 billion at
December 31, 1997.
Counterparty Credit Risk
------------------------
Ford manages its foreign currency and interest rate counterparty credit risks by
limiting exposure to and by monitoring the financial condition of each
counterparty. The amount of exposure Ford may have to a single counterparty on a
worldwide basis is limited by company policy. In the unlikely event that a
counterparty fails to meet the terms of a foreign currency or an interest rate
instrument, the company's risk is limited to the fair value of the instrument.
Other Financial Agreements
--------------------------
At December 31, 1998, the notional amount of commodity hedging contracts
outstanding totaled $853 million; the notional amount at December 31, 1997 was
$496 million. The company also had guaranteed $826 million of debt of
unconsolidated subsidiaries, affiliates and others at December 31, 1998. The
risk of loss under these financial agreements is not material.
FS-27
NOTE 15. Acquisitions, Dispositions and Restructuring
------------------------------------------------------
Automotive Sector
-----------------
Restructurings
--------------
Ford recorded a pre-tax charge of $726 million ($472 million after taxes) in the
fourth quarter of 1998 for retirement and separation programs. These special
voluntary and involuntary programs reduce the workforce by 2,184 persons in
North America (all salaried), 1,977 in Europe (1,304 hourly and 673 salaried)
and 4,650 in South America (4,400 hourly and 250 salaried). The costs were
charged to Automotive segment ($674 million) in cost of sales, Visteon segment
($38 million) in cost of sales, Ford Credit segment ($9 million) in operating
and other expenses, and other Financial Services operations ($5 million) in
operating and other expenses.
Ford recorded a pre-tax charge of $272 million ($169 million after taxes) in the
second quarter of 1997, reflecting actions that were completed during 1997 and
1998. These included primarily the discontinuation of passenger car production
at the Lorain Assembly Plant resulting in a write-down of surplus assets. The
charge also included employee termination costs related to the elimination of a
shift at the Halewood (England) Plant, and a loss on the sale of the heavy truck
business.
Cost for special voluntary employee separation programs reduced the Automotive
sector's net income for 1996 by $436 million. The programs affected about
3,500 salaried employees, primarily in the U.S.
Write-Down of Kia Motors Corporation
------------------------------------
During the fourth quarter of 1998, Ford recorded a pre-tax charge of
$111 million ($86 million after taxes) to write-off its net exposure to Kia
Motors Corporation ("Kia"). The write off of Xxxx's exposure was recorded in
cost of sales. Ford's share of Mazda Motor Corporation's ("Mazda") exposure was
recorded in equity in net income of affiliates.
Batavia/ZF Friedrichshafen AG Joint Venture
-------------------------------------------
During the fourth quarter of 1998, Ford recorded in cost of sales a pre-tax
charge of $112 million ($73 million after taxes) related to the fair value
transfer of its Batavia (Ohio) Transmission Plant to a new joint venture company
formed by Ford and ZF Friedrichshafen AG of Germany. The transaction is expected
to be completed in the first quarter of 1999. The new joint venture will be
reflected in Ford's consolidated financial statements on an equity basis.
Investment in Mazda Motor Corporation
-------------------------------------
During May 1996, Ford increased its investment in Mazda from its existing
24.5% ownership interest to a 33.4% ownership interest by purchasing from Mazda
newly-issued shares of common stock for an aggregate purchase price of
$484 million. In connection with the purchase of shares, Mazda agreed to
coordinate more closely with Ford its strategies and plans, particularly in the
areas of product development, manufacturing and distribution of vehicles, so as
to improve the competitiveness and economies of scale of both companies. Ford
and Mazda remain separate public companies with separate identities. Ford is not
responsible for any of Mazda's liabilities, debts or other obligations, and
Mazda's operating results and financial position are not consolidated with those
of Ford; Mazda continues to be reflected in Ford's consolidated financial
statements on an equity basis.
FS-28
NOTE 15. Acquisitions, Dispositions and Restructuring (continued)
------------------------------------------------------
Financial Services Sector
-------------------------
Associates First Capital Corporation
------------------------------------
During the second quarter of 1998, the company completed a spin-off of Ford's
80.7% (279.5 million shares) interest in The Associates. As a result of the
spin-off of The Associates, Ford recorded a gain of $15,955 million in the first
quarter of 1998 based on the fair value of The Associates as of the record date,
March 12, 1998. The spin-off qualified as a tax-free transaction for U.S.
federal income tax purposes. During the second quarter of 1996, The Associates
completed an initial public offering ("IPO") of its common stock representing a
19.3% economic interest in The Associates. Ford recorded a second quarter
1996 gain of $650 million resulting from the IPO; the gain was not subject to
income taxes.
Hertz Corporation
-----------------
In the second quarter of 1997, Hertz, a subsidiary of Ford, completed an IPO of
its common stock representing a 19.1% economic interest in Hertz. Ford recorded
a second quarter 1997 gain of $269 million resulting from the IPO; the gain was
not subject to income taxes.
Ford Leasing
------------
During the third quarter of 1996, Ford Leasing Corporation, then known as USL
Capital Corporation ("USL Capital"), a subsidiary of Ford Holdings, Inc.,
concluded a series of transactions for the sale of substantially all of its
assets, as well as certain assets owned by Ford Credit and managed by USL
Capital. Proceeds from the sales were used to pay down related liabilities and
debt. Ford recorded a pre-tax gain of $263 million from the sales ($95 million
gain after taxes).
Budget Rent a Car
-----------------
The company recorded a pre-tax charge in 1996 totaling $384 million
($233 million after taxes) to recognize the estimated value of its outstanding
notes receivable from, and preferred stock investment in, Budget Rent a Car
Corporation ("BRAC"). The initial provision taken in the second quarter of
1996 totaling $700 million ($437 million after taxes) resulted from conclusions
reached in a study of Ford's rental car business strategy. In accordance with
SFAS 114, the notes receivable provision reflected primarily the unsecured
portion of financing provided to BRAC by Ford. The preferred stock write-down
reflected recognition of the fair value of Xxxx's investment at the time. In the
fourth quarter of 1996, the notes receivable provision was reduced by
$316 million ($204 million after taxes), reflecting a strengthening of the
rental car business, recent sales of rental car franchises, and increased
investor interest that led to a reassessment of the value of the outstanding
common stock of BRAC; Ford became the owner of approximately 22% of Team Rental
as a result of the partial repayment in Team Rental stock of Ford's loans to
BRAC. In the fourth quarter of 1997, Ford sold its shares of Budget Group
(formerly "Team Rental") stock. The gain on sale was not material.
FS-29
NOTE 16. Cash Flows
--------------------
The reconciliation of net income to cash flows from operating activities is as
follows (in millions):
1998 1997 1996
-------------------- -------------------- ---------------------
Financial Financial Financial
Automotive Services Automotive Services Automotive Services
---------- --------- ---------- --------- ---------- ---------
Net income $ 4,752 $17,319 $ 4,714 $ 2,206 $ 1,655 $ 2,791
Adjustments to reconcile net income
to cash flows from operating activities:
Depreciation and amortization 5,740 8,589 5,938 7,645 5,916 6,875
Losses/(earnings) of affiliated
companies in excess of dividends
remitted 82 (2) 127 (1) 44 (16)
Provision for credit and
insurance losses - 1,798 - 3,230 - 2,564
Foreign currency adjustments (208) - (27) - 156 -
Net (purchases)/sales of trading
securities (5,434) (205) (2,307) 67 (5,180) 62
Provision for deferred income taxes 421 504 908 (102) 74 530
Gain on spin-off of The Associates
(Note 15) - (15,955) - - - -
Gain on sale of common stock of a
subsidiary (Note 15) - - - (269) - (650)
Changes in assets and liabilities:
Decrease/(increase) in accounts
receivable and other current assets 1,027 (1,189) (179) 256 (2,183) (1,328)
(Increase)/decrease in inventory (254) - 1,234 - 553 -
Increase/(decrease) in accounts payable
and accrued and other liabilities 3,019 1,728 3,854 (121) 5,447 1,303
Other 477 891 (278) 739 94 550
------- ------- ------- ------- ------- -------
Cash flows from operating activities $ 9,622 $13,478 $13,984 $13,650 $ 6,576 $12,681
======= ======= ======= ======= ======= =======
The company considers all highly liquid investments purchased with a maturity of
three months or less, including short-term time deposits and government, agency
and corporate obligations, to be cash equivalents. Automotive sector cash
equivalents at December 31, 1998 and 1997 were $3.4 billion and $5.8 billion,
respectively; Financial Services sector cash equivalents at December 31, 1998
and 1997 were $500 million and $800 million, respectively. Cash flows resulting
from futures contracts, forward contracts and options that are accounted for as
xxxxxx of identifiable transactions are classified in the same category as the
item being hedged. Purchases, sales and maturities of trading securities are
included in cash flows from operating activities. Purchases, sales and
maturities of available-for-sale and held-to-maturity securities are included in
cash flows from investing activities.
Xxxx paid for interest and income taxes was as follows (in millions):
1998 1997 1996
------ ------- ---------
c>
Interest $9,120 $10,430 $10,250
Income taxes 2,027 1,301 1,285
FS-30
NOTE 17. Segment Information
-----------------------------
Ford adopted Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information, effective with year-end
1998. This standard requires companies to disclose selected financial data by
operating segment (defined in Note 1). Ford has identified four primary
operating segments: Automotive, Visteon, Ford Credit, and Hertz. Segment
selection was based upon internal organizational structure, the way in which
these operations are managed and their performance evaluated by management and
Ford's Board of Directors, the availability of separate financial results, and
materiality considerations. Segment detail is summarized as follows (in
millions):
Automotive Sector Financial Services Sector
------------------ ----------------------------- Total Total
Auto- Ford Other Elims/ Auto Fin Svcs
motive Visteon Credit Hertz Fin Svcs Other Sector Sector
--------- -------- -------- ------- -------- -------- -------- --------
1998
----
Revenues
External customer revenues $118,017 $ 1,412 a/ $ 19,095 $ 4,241 $ 1,997 $ (346) $119,083 $ 25,333
Intersegment revenues 3,839 16,350 208 9 272 (20,678) 0 0
-------- ------- -------- ------- -------- -------- -------- --------
Total Revenues $121,856 $17,762 $ 19,303 $ 4,250 $ 2,269 $(21,024) $119,083 $ 25,333
======== ======= ======== ======= ======== ======== ======== ========
Income
Income before taxes $ 5,829 $ 1,129 $ 1,812 $ 465 $ 16,161 b/ $ 0 $ 6,958 $ 18,438
Provision for income taxes 1,739 420 680 188 149 0 2,159 1,017
Net income 4,040 712 1,084 277 16,060 b/ (102) 4,752 17,319
Other Disclosures
Depreciation/amortization $ 5,181 $ 559 $ 7,327 $ 1,186 $ 45 $ 31 $ 5,740 $ 8,589
Interest income 1,414 58 - - - (141) 1,331 -
Interest expense 1,089 102 6,910 318 1,114 (668) 829 8,036
Capital expenditures 7,252 861 67 317 120 0 8,113 504
Unusual items 0 0 0 0 15,955 b/ 0 0 15,955
Unconsolidated affiliates
Equity in net income (64) 26 2 0 0 0 (38) 2
Investments in 2,191 214 76 0 0 0 2,405 76
Total assets at year-end 83,214 9,565 137,248 8,873 6,181 (7,536) 88,744 148,801
-------------------------------------------------------------------------------------------------------------------------
1997
----
Revenues
External customer revenues $121,976 $ 1,217 a/ $ 17,144 $ 3,895 $ 9,653 $ (258) $122,935 $ 30,692
Intersegment revenues 4,749 16,003 201 10 266 (21,229) 0 0
-------- ------- -------- ------- -------- -------- -------- --------
Total Revenues $126,725 $17,220 $ 17,345 $ 3,905 $ 9,919 $(21,487) $122,935 $ 30,692
======== ======= ======== ======= ======== ======== ======== ========
Income
Income before taxes $ 6,257 $ 825 $ 1,806 $ 343 $ 1,708 c/ $ 0 $ 7,082 $ 3,857
Provision for income taxes 2,014 308 727 142 550 0 2,322 1,419
Net income 4,196 518 1,031 202 1,205 c/ (232) 4,714 2,206
Other Disclosures
Depreciation/amortization $ 5,346 $ 592 $ 6,188 $ 1,068 $ 364 $ 25 $ 5,938 $ 7,645
Interest income 1,228 17 - - - (129) 1,116 -
Interest expense 904 82 6,268 316 3,523 (593) 788 9,712
Capital expenditures 7,225 917 49 211 315 0 8,142 575
Unusual items 0 0 0 0 269 c/ 0 0 269
Unconsolidated affiliates
Equity in net income (117) 29 1 0 0 0 (88) 1
Investments in 1,782 195 84 0 0 0 1,977 84
Total assets at year-end 82,034 8,751 121,973 7,436 68,348 (9,445) 85,079 194,018
------------------------------------------------------------------------------------------------------------------------
1996
----
Revenues
External customer revenues $116,887 $ 1,368 a/ $ 16,476 $ 3,668 $ 8,913 $ (321) $118,023 $ 28,968
Intersegment revenues 5,001 15,111 229 11 985 (21,337) 0 0
-------- ------- -------- ------- -------- -------- -------- --------
Total Revenues $121,888 $16,479 $ 16,705 $ 3,679 $ 9,898 $(21,658) $118,023 $ 28,968
======== ======= ======== ======= ======== ======== ======== ========
Income
Income before taxes $ 1,973 $ 598 $ 2,240 $ 256 $ 1,726 d/ $ 0 $ 2,571 $ 4,222
Provision for income taxes 642 220 732 98 474 0 862 1,304
Net income 1,274 381 1,441 159 1,318 d/ (127) 1,655 2,791
Other Disclosures
Depreciation/amortization $ 5,406 $ 510 $ 5,538 $ 975 $ 336 $ 26 $ 5,916 $ 6,875
Interest income 895 16 - - - (70) 841 -
Interest expense 749 79 6,260 309 3,378 (376) 695 9,704
Capital expenditures 7,240 969 44 194 204 0 8,209 442
Unusual items 0 0 0 0 529 d/ 0 0 529
Unconsolidated affiliates
Equity in net income (53) 47 0 0 1 (2) (6) (1)
Investments in 2,245 206 76 0 0 0 2,451 76
Total assets at year-end 73,976 7,906 121,696 7,649 58,694 (7,054) 79,658 183,209
- - - - -
a/ Includes sales to outside fabricators for inclusion in components sold to
Ford's Automotive segment. These sales are eliminated in total Automotive
sector reporting.
b/ Includes $15,955 non-cash gain (not taxed) on spin-off of The Associates in
the first quarter of 1998 (Note 15).
c/ Includes $269 gain (not taxed)on Hertz IPO in the second quarter of 1997
(Note 15).
d/ Includes $650 gain (not taxed)on The Associates IPO in the second quarter of
1996, $263 gain on sale of USL Capital assets, $384 loss resulting from the
write-down of Budget Rent A Car notes receivable in 1996 (Note 15).
FS-31
NOTE 17. Segment Information (continued)
-----------------------------
"Other Financial Services" data is an aggregation of miscellaneous smaller
Financial Services Sector business components, including Ford Motor Land
Development Corporation, Ford Leasing Development Company, Ford Leasing
Corporation, and Granite Management Corporation, and certain unusual
transactions (footnoted). Also included is data for The Associates, which was
spun-off from Ford in 1998.
"Eliminations/Other" data includes intersegment eliminations and minority
interest calculations. Data for "Depreciation/amortization" includes
depreciation of fixed assets and assets subject to operating leases and
amortization of special tools. Interest income for the operating segments in the
Financial Services sector is reported as "Revenue".
Information concerning principal geographic areas was as follows (in millions):
Geographic Areas
----------------
United All Total
States Europe Other Company
--------- -------- ------- ---------
1998
----
External revenues $100,597 $27,026 $16,793 $144,416
Net property 25,761 11,018 7,260 44,039
1997
----
External revenues $105,581 $27,618 $20,428 $153,627
Net property 23,948 9,596 7,090 40,634
1996
----
External revenues $ 98,887 $30,478 $17,626 $146,991
Net property 22,950 9,720 6,868 39,538
NOTE 18. Summary Quarterly Financial Data (Unaudited)
------------------------------------------------------
(in millions, except amounts per share)
1998 1997
---------------------------------------- -----------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- ------- ------- ------- ------- ------- --------
Automotive
Sales $29,076 $31,309 $26,494 $32,204 $30,037 $32,805 $28,196 $31,897
Operating income 1,806 2,922 777 1,180 1,704 2,444 846 1,952
Financial Services
Revenues 7,508 5,980 6,146 5,699 7,277 7,460 7,900 8,055
Income before income taxes 16,813 590 645 390 830 1,199 912 916
Total Company
Net income 17,646 2,381 1,001 1,043 $ 1,469 $ 2,530 $ 1,125 $ 1,796
Less:
Preferred stock dividend
requirements 95 4 4 4 14 14 13 13
------- ------- ------- ------ ------- ------- ------- -------
Income attributable
to Common and
Class B Stock $17,551 $ 2,377 $ 997 $ 1,039 $ 1,455 $ 2,516 $ 1,112 $ 1,783
======= ======= ======= ======= ======= ======= ======= =======
AMOUNTS PER SHARE OF COMMON
AND CLASS B STOCK AFTER
PREFERRED STOCK DIVIDENDS
Basic income $ 14.48 $ 1.96 $ 0.82 $ 0.86 $ 1.23 $ 2.11 $ 0.93 $ 1.48
Diluted income 14.23 1.91 0.80 0.84 1.20 2.06 0.91 1.45
Cash dividends 0.42 0.42 0.42 0.46 0.385 0.42 0.42 0.42
FS-32
PricewaterhouseCoopers LLP
Report of Independent Accountants
---------------------------------
To the Board of Directors and Stockholders
Ford Motor Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Ford Motor Company
and Subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
January 21, 1999
