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DEARBORN - This week on Mark Fields’ The Americas Webcast, Ford Chief Financial Officer Lewis Booth shared his insights regarding Ford’s 2011 fourth-quarter and year-end financial results which were reported last Friday. Ford posted fourth-quarter net income of $13.6 billion, an increase of $13.4 billion from fourth quarter 2010 and a full year 2011 net income of $20.2 billion, with one-time special items contributing to the results.
Below are highlighted excerpts from that discussion.
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Mark Fields: As part of last week's financial announcement, there was a huge positive non-cash gain. Can you explain that special item?
Lewis Booth: I can do it in two ways. I can tell you about the accounting, which isn’t so exciting, and I can also tell you what it means for the business. Let me just try to simplify it a little bit.
Back in 2006, we started to make big losses. When you make big losses you generate a thing called a deferred tax asset. This means if you subsequently make profits, you don’t have to start paying taxes on those profits until you wipe off the losses you've previously made.
Our conclusion in 2006, was that we were not going to be making money in the foreseeable future and those deferred tax assets were going to have no value.
So rather than putting them on the balance sheet at a full value, they wrote them back to essentially zero. Because we've been making money in the last three years, the accounting will say you should probably bring them back onto the books because they will have value.
But you have to also be confident that you will make money in the forward years to actually use up those deferred tax assets.
Moving away from the accounting piece, to me the story is that we've improved the business and have made profits in the last three years in a row. We are confidently predicting that we're going to make substantial profits in the next few years, sufficient to utilize all of our deferred tax assets.
Now just as a reminder, it's non-cash, but it does improve the equity of our balance sheet. So when people look at our balance sheet, they can now get a better value of the business. I thought it was a really positive statement about our belief in the future of the business.
Mark Fields: A good analogy of this is when people make personal investments. Say they incur a loss and a couple years later if they actually make a gain they can offset that in their income tax.
Lewis Booth: That's exactly the comparison. You also know that until you make a gain, that tax credit is of no value. We're now saying we're going to make profits in the foreseeable future and utilize those tax losses.
Mark Fields: Operating margins are very important because that’s a performance comparison of Ford versus the competition. Can you explain operating margins and our mid-term decade objectives?
Lewis Booth: Our operating margins are earnings before interest and taxes, divided by revenue.
Cost is both contribution costs and structural costs. Our mid-decade guidance from a North American perspective is that we'll be operating in the 8-to-10 percent operating margin range, that’s where North America been for the last couple of years.
For the total company, we'll be operating in an 8-to-9 percent range. At 6.1 percent in 2010, we were clearly on our way,at 5.4 percent, it gives us some work to do.
One of the things that we guided on Friday is that we expect 2012 operation margins to improve from 2011.
We know we have to grow the business to keep the scale that is required to be competitive, but we also have to grow the business and improve our operating margins.
That means we have to manage the increase of structural costs that we're putting in and there will be an increase of structural costs because we do need to engineer more products to grow the business.
We do need to build plants in APA and expand South America as well as expand in Russia for example. But we have to manage the way we increase those and I think that’s an issue we've been working on very hard.