March 13, 2015 Vice President and Controller FORD UNIVERSITY Stuart Rowley
FORD UNIVERSITY Agenda for today’s discussion: • Warranty Reserves • China JV Equity Earnings • Venezuela Accounting Change • Cash Drivers -- Working Capital and Timing Differences • Taxes Appendix • Reference materials • Reconciliations to GAAP Also posted on the Investor Relations website are the 2015 Ford Credit University and the 2014 Ford University materials SLIDE 1
AGENDA • Warranty Reserves • China JV Equity Earnings • Venezuela Accounting Change • Cash Drivers -- Working Capital and Timing Differences • Taxes SLIDE 2
WARRANTY OVERVIEW Description Elements • Full vehicle coverage Base Coverage • Extended coverage for selected components -- e.g., Powertrain • Safety Recalls Field Service Action • Emission Recalls • Other Product Campaigns • Roadside Assistance Customer Satisfaction Action • Transportation Assistance Warranty Costs Are Accrued At Wholesale And Adjusted Following A Proven Set Of Guidelines SLIDE 3
BASE COVERAGES History Accrual Reserve Adequacy • Historical warranty • Initial Accrual • Conduct quarterly claims are used in the reserve reviews to: development of lifetime Cost Per Unit − Ensure lifetime Cost warranty cost per unit Per Unit are aligned estimates Wholesale Volume with actual claims • The cost per unit experience calculation transitions − Adjust reserve up or to reflect actual data as Initial Accrual (Mils.) down, as required vehicle time in service matures • Actual experience also • Reserve adjustments impacts future accrual based on adequacy rates reviews The Lifetime Cost Per Unit Evolves As The Model Year Matures SLIDE 4
FIELD SERVICE ACTIONS History Accrual Reserve Adequacy • Average seven model • Initial Accrual • Conduct review of years of history to approved Field Service Cost Per Unit develop Cost Per Unit Action programs Wholesale Volume • Evaluate reserve levels • 2015 Model Year Cost relative to historical Per Unit is an average performance of 2005 MY -- 2011 MY Initial Accrual (Mils.) • Adjust reserve up or • Approved actions down, as required charged to accrual, exceptions: • Actual experience can − Large actions above a also impact future pre-defined threshold accrual rates − Older model years • Reserve adjustments based on adequacy reviews The Field Service Action Initial Accrual Creates A Reserve For Future Recall Decisions SLIDE 5
GLOBAL WARRANTY -- 2014 10-K Global Full Year 2013 2014 (Mils.) (Mils.) Beginning Balance $ 3,657 $ 3,927 Payments made during the period (2,302) (2,850) $ (548) Changes in accrual related to warranties 2,025 2,108 issued during the period Changes in accrual related to pre-existing 625 1,746 $ 1,121 warranties and other adjustments Foreign currency translation and other (78) (145) * Ending Balance $ 3,927 $ 4,785 ----- *excludes customer satisfaction actions We Have A Proven Set Of Guidelines And Do Not Anticipate Any Changes To Our Processes SLIDE 6
AGENDA • Warranty Reserves • China JV Equity Earnings • Venezuela Accounting Change • Cash Drivers -- Working Capital and Timing Differences • Taxes SLIDE 7
FORD IN CHINA Ford “Joint Ventures” in China CAF JMC CFME Ford Lincoln Non-Premium Trucks and Premium Engine Non-Premium Passenger Commercial Passenger Production Passenger Import Local Local Local Import Manufacture Manufacture Manufacture Equity Equity Equity 100% Ford Investment Investment Investment 100% Ford (50%) (32%) (25%) Ford’s other activities in China include its Asia Pacific Regional Headquarters, Ford Auto Financing China, and a growing engineering center Ford Business In China Consists Of Five Primary Elements SLIDE 8
FORD “JOINT VENTURES” IN CHINA CAF JMC CFME Ford Share Ford Share Ford Share of Net of Net of Net Income Income Income Starting With 2014 Results, Ford Began Disclosing The Aggregate Net Income of Our Chinese Joint Ventures; For Full Year 2014, It Was $1.3 Billion SLIDE 9
FORD ASIA PACIFIC FINANCIAL RESULTS China Ford Non- Ford JV and China Ford Costs Entities Lincoln Asia Asia and -- Ford Imports Pacific Pacific Income Share of for Markets Related Net China to JVs Income Disclosed Disclosed Ford Asia Pacific Profit Includes China Joint Venture Entities, Ford Costs Related To JVs, Ford And Lincoln Imports, And Non-China Markets SLIDE 10
AGENDA • Warranty Reserves • China JV Equity Earnings • Venezuela Accounting Change • Cash Drivers -- Working Capital and Timing Differences • Taxes SLIDE 11
VENEZUELA ACCOUNTING CHANGE • Venezuelan exchange control regulations have resulted in a lack of exchangeability between the Venezuelan bolivar and the U.S. dollar • Dividend payments have been restricted for many years • Combined with other Venezuelan regulations, parts availability has been constrained and are now limiting the ability to maintain normal production • As a result, we changed the method of accounting used to report the results of our Venezuelan operations • Our Automotive operations in Venezuela remain unchanged. We will continue to produce vehicles to the extent we can manage production based on the availability of foreign currency Effective December 31, 2014, We Began Reporting The Results Of Venezuela Using The Cost Method Of Accounting SLIDE 12
VENEZUELA ACCOUNTING CHANGE Prior Accounting One-Time Change Present Accounting Consolidation Method of Change in Method of Cost Method of Accounting Accounting Accounting • Used until year-end 2014 • Effective Dec. 31, 2014 • Used in 2015 and beyond • All Venezuelan revenues, • $800 million pre-tax • Ford’s financial results expenses, gains, and special item charge will not include the losses included in Ford’s included in Ford’s operating results of operating results results and Venezuela • All Venezuelan assets • Cash balance of • Cash and income will be and liabilities appear on $477 million no longer recorded to the extent we Ford’s consolidated reported in Automotive are paid for parts we sell balance sheet gross cash to Venezuela or we receive dividends Further Devaluations Of The Venezuelan Bolivar Will Not Have An Impact On Our Financial Results SLIDE 13
AGENDA • Warranty Reserves • China JV Equity Earnings • Venezuela Accounting Change • Cash Drivers -- Working Capital and Timing Differences • Taxes SLIDE 14
2014 AUTOMOTIVE CASH FLOW* Full Year (Bils.) Gross cash at end of period $ 21.7 Gross cash at beginning of period 24.8 Change in gross cash $ (3.1) Automotive pre-tax profits** $ 4.5 Capital spending (7.4) Depreciation and tooling amortization 4.3 Changes in working capital (0.3) Other / Timing differences 2.5 Automotive operating-related cash flow $ 3.6 Separation payments (0.2) Net receipts from Financial Services sector 0.6 Other (mainly Venezuela accounting change) (0.8) Cash flow before other actions $ 3.2 Changes in debt (0.9) Funded pension contributions (1.5) Dividends / Other items (3.9) Change in gross cash $ (3.1) * See Appendix for reconciliation to GAAP ** Excludes special items; see Appendix for detail and reconciliation to GAAP SLIDE 15
2014 AUTOMOTIVE OPERATING-RELATED CASH FLOW Quarter Full First Second Third Fourth* Year* (Bils.) (Bils.) (Bils.) (Bils.) (Bils.) Automotive pre-tax profits** $ 0.9 $ 2.2 $ 0.7 $ 0.7 $ 4.5 Capital spending $ (1.5) $ (1.9) $ (1.8) $ (2.2) $ (7.4) Depreciation and amortization 1.0 1.0 1.1 1.2 4.3 Net spending $ (0.5) $ (0.9) $ (0.7) $ (1.0) $ (3.1) Changes in working capital 1.7 (0.7) (1.5) 0.2 (0.3) Other / Timing differences (0.9) 2.0 0.8 0.6 2.5 Operating-related cash flow $ 1.2 $ 2.6 $ (0.7) $ 0.5 $ 3.6 Comprised of changes in receivables, inventory, and trade payables Includes differences due to warranty, marketing, and compensation * See Appendix for reconciliation to GAAP ** Excludes special items; see Appendix for detail and reconciliation to GAAP SLIDE 16
CALENDARIZATION FACTORS -- PRODUCTION AND CASH FLOW SEASONALITY* Global Production Volume** Operating-Related Cash Flow Fourth First Second Third Quarter Quarter Quarter Quarter * Based on average data from the past five years ** Scale adjusted to highlight quarterly seasonality Generally, Operating-Related Cash Flow Seasonality Is Aligned With Production Volumes SLIDE 17
KEY DRIVERS OF CHANGES TO WORKING CAPITAL Elements of Key Drivers Working Capital • Production Volumes: – Customer demand – Seasonality for plant shutdowns Receivables – Launch schedules • Vehicle production mix • In-transit vehicles (exported Inventory between countries) • Variability in government-related tax receivables Payables • Supplier payment terms changes SLIDE 18
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