Ford 2007 Annual Report Download - page 38

Management’s Discussion and Analysis of Financial Condition and Results of Operations
36 Ford Motor Company | 2007 Annual Report
Our plan to achieve structural and other cost reductions in our North America Automotive operations in 2008 includes
the following key elements:
• Another round of enterprise-wide buyout offers to our hourly UAW-represented employees and continued progress on
reducing our manufacturing capacity, as described in "Overview;"
• Sale or closure of essentially all of the ACH businesses by the end of 2008;
• Continued reduction of salaried employment, primarily through attrition;
• Acceleration of global product development initiatives to leverage our global assets and technologies, as well as more
efficient capital spending and product engineering;
• Efficiencies in advertising, merchandising and other overhead costs;
• Acceleration of vehicle complexity reductions, which also will assist material cost reduction efforts.
During the period 2007 through 2009, we expect cumulative Automotive operating-related cash outflows of $7 billion to
$8 billion, and cumulative cash expenditures for personnel separations of $5 billion to $6 billion. The operating-related
cash outflow primarily reflects the cash impact of accelerating interest supplement and lease support payments to Ford
Credit beginning this year (about $5 billion) as described below, and anticipated operating losses in our Automotive sector
through 2008. The cash outflows also reflect our expectation to continue to invest in new products throughout this period
at about the same level as we have during the past few years (i.e., $6 billion to $7 billion annually). We do not expect the
benefits of our recent labor agreement with the UAW to begin contributing meaningfully to our cash flow prior to 2010.
Within our Financial Services sector, we expect Ford Credit to be profitable in 2008, although at a lower level than in
2007. This is down from our outlook of "about equal" announced on January 24, 2008. Our revised outlook primarily
reflects higher depreciation expense and severity as a result of continued auction market weakness. The lower earnings
expected in 2008 compared with 2007 primarily reflect our expectation of higher credit losses, lower volume, higher net
losses related to market valuation adjustments from derivatives, and higher depreciation expense, partially offset by higher
margin and lower operating costs. At year-end 2008, we anticipate managed receivables to be in the range of $130 billion
to $140 billion. This anticipated decrease in managed receivables levels primarily reflects the expected impact of net
receivable liquidations and the implementation of alternative business arrangements and other strategic actions.
Effective January 1, 2008, to reduce ongoing Automotive obligations to Ford Credit and consistent with general
industry practice, we began paying interest supplements and residual value support to Ford Credit on an upfront, lump-
sum basis at the time Ford Credit purchases eligible contracts from dealers. This differs from our past practice of
spreading these payments over the expected life of the contracts, which will continue for contracts purchased by Ford
Credit prior to 2008 (at December 31, 2007, the outstanding amount of interest supplement and lease support payments
owed to Ford Credit was $6.3 billion, which is expected to be paid by the end of 2011). The change to upfront, lump-sum
payments for contracts purchased after 2007 is expected to result in the acceleration of payments totaling about $5 billion
through 2009 that, under the past practice, otherwise would have been paid after 2009. This change will not have a
significant impact on Ford Credit's income statement or statement of shareholder's interest/equity because Ford Credit will
continue to recognize the income over the term of the contract.
Subject to Ford Credit's ability to execute its funding plan and maintain sufficient liquidity, Ford Credit plans to increase
its managed leverage to about 11.5 to 1 by the end of 2008, up from 9.8 to 1 at year-end 2007, and pay dividend
distributions beginning in 2008. These distributions will reflect Ford Credit's 2008 net income plus a return of capital
reflecting the planned increase in leverage, as well as a projected smaller receivable base. Based upon these factors, we
forecast the distributions to total about $5 billion through 2009.
U.S. economic conditions have softened during the course of 2007, with difficulties for the U.S. automotive industry
primarily associated with three factors: significant declines in homebuilding, home sales, and home prices; further
increases in oil and gasoline prices; and subprime mortgage contraction and associated contraction in other types of
credit market activity. Sales of full-size pickup trucks are closely correlated with the housing sector; as the housing sector
slows, we expect lower pickup truck sales. Together, these adverse factors increase the risk of recession. Additional
concerns include the near-term impact of rising commodity prices (oil, steel, aluminum, and resins) and the ongoing
weakness in the U.S. dollar.
Nevertheless, based on the assumptions and metrics set forth above, we expect our total Company full-year 2008 pre-
tax results, including special items, to be a loss, though improved from 2007 results. We anticipate 2008 special items will
be lower than 2007, and will include personnel separation costs of up to $1 billion.