The net income of Ford Credit reduced drastically in 2007 $775mn from $1283mn that is a reduction of $508mn. The income before income taxes was $1215mn after a reduction of $738mn from 2006.
The lower earnings before taxes were probably due to higher provision for credit losses resulting from the non-recurrence of credit loss reserve reductions (approx $500mn), lower financing margin since the borrowing costs had increased (approx $400mn), higher depreciation expense of leased vehicles because of the unfavorable performance of residual value of leased vehicles (approx $400mn), and other higher costs perhaps due to the transformation in the North American business (approx $100mn).
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There were also factors in favor of the business which off-set these costs partially such as the operating costs improved due to lower expenses (around $400mn) and the net losses coming from market value adjustments from derivatives were lower (around $300mn). The following table shows the details of operations of each segment of Ford Motor Company. The decrease in the North American and International segment earnings have been primarily due to the above explained factors but the effect was offset partially by the decline in the operating costs.
The unallocated risk management is seen to improve in 2007 due to the lower losses resulting from market based adjustments. The following balance sheets explain the financial condition of the company in the previous 3 years by showing the financial receivables and operating leases. The number of finance receivables and operating leases investments has increased over the years as shows in the on-balance sheet while the managed receivables decreased due to a decline in the Us retail installments and whole sale receivables but these were offset partially by currency exchange rates and the increase in the operating leases net investment.
When we analyze the income statement of Ford Motor Company for the past two years, it is seen that though the financing revenue from operating leases, retail and wholesale increased in 2007 but due to the rise in depreciation and interest expense, the net financing margin decreased. Other revenue coming from investments, sale of receivables and insurance premiums also reduced.
There were huge provision of credit losses but this was offset to some extent by lower operating and insurance expenses. This resulted in reduced net income in 2007 as compared to 2006. The asset side of the balance sheet shows that though the marketable securities declined considerably but this was offset by increased cash, finance receivables and net investment in operating leases and derivative financial instruments causing the total assets figure to rise in 2007.
The total liabilities were almost similar to 2006 with a slight decline due to the payment of debt obligations by affiliated companies. Total shareholder’s equity also increased due to rise in comprehensive income and retained earnings. Thus, the review of the financial statements give us a picture that though the net income of the company has declined but the overall financial condition has not worsened since the assets and equity have increased while the liabilities have decreased (SEC, 2008).
I think that Ford Motor and Credit Company’s performance is declining gradually as seen by its annual statements and balance sheets. If there is any improvement then it is to a very slight extent since the company is still in losses. It has to sell its Jaguar and Land Rover operations to India for paying off the surmounting debt which shows that the company has financial and liquidity problems. The board should come up with strong measures in order to strengthen the financial condition of the company.