Ford's full FHR report - Rapid Ratings

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Section 1: Executive Summary YOY credit quality has improved: For the most recent period, the 12 months (rolling quarters) ended Dec 31, 2011, Ford Motor Co has experienced a strong improvement in financial health, as evidenced by a 17 point FHR increase, largely reflecting improvements delivered in overall profitability, cost structure and sales performance. The quarterly score change was a 4 point rise. Now Moderate Risk: At the same time, the rating now depicts a Moderate Risk credit profile as debt service management, overall profitability and cost structure are at high levels relative to the global data set. These areas represent key contributors to the overall strength of the company. Figure 3: Non-linear Risk Scale Highest Default Risk Lowest 0 10 20 30 40 50 60 70 80 90 100 Financial Health Rating Figure 3 indicates observed default incidences across the complete spectrum of FHR levels. 50% of defaults occurred with an FHR below 25, while 80% were below 40. Name: Ford Motor Co FHR: 68 Risk Level: Moderate Risk FHR Report Ford Motor Co, February 24, 2012 Weaknesses: Ford Motor Co demonstrates weakness in leveraging, sales performance and working capital efficiency relative to the global industry set, and has done so traditionally as well as currently. The cash flow story is mixed: While Ford Motor Co generated positive cash from operations in the most recent period, overall performance was mixed. Although cash flow coverage of capital expenditures was exceptionally strong, free cash flow coverage of debt was only moderate. Very inconsistent history: From an historical perspective, Ford Motor Co has displayed a very inconsistent risk profile as the rating has moved within four different risk categories during the period (YE 2003 - YE 2011). Over that time the rating fluctuated from a high of 68 in FY 2011 to a low of 11 in FY 2009. Ford Motor Co is currently an investment grade company. Moderate underperformance in generating returns: The Return on Capital Employed (ROCE) for the most recent period, which at 8.15% represents a moderate underperformance and is a modest decline as compared to the previous full year at 8.55%, is modestly below the high point of 8.96% achieved in Q1 2011. The range over the past three years has been between -13.66% and 8.96%. The bottom line: Ford Motor Co is situated in our Moderate Risk group, displays strength in three of our six performance categories, somewhat offset by moderate underperformance in ROCE, and was upgraded in the most recent period. This suggests that to those for whom Ford Motor Co represents an existing exposure, and/or for those considering Ford Motor Co as a new or increased exposure, such exposure represents a reasonable risk. Rapid Ratings | © All rights reserved Rapid Ratings International 2012 Page 2 of 9
Section 2: DuPont Analysis Economic value added is growing but at a declining rate Consistent with the Rapid Ratings methodological underpinning, focusing on efficiency across the analytics, we employ DuPont Analysis to distinguish between the company’s efficiency in generating profits, and in generating sales. This analysis generates ROCE - the return on capital employed - the primary Du Pont analysis result.¹ In the four quarters ended December 31, 2011, Ford Motor Co had a ROCE of 8.15%, which is moderately below the generally accepted threshold range and indicates that the company is not making efficient use of its assets. A top performing firm has a ROCE of at least 15 – 20%. Contrasting Return on Capital Employed (ROCE) with the cost of capital provides a window into management's success in growing Section 3: FHR History and Performance Category Scores Table 3 presents the FHR and Performance Category Scores for Ford Motor Co. Each rating period is labeled with the financial period end of the most recent financial reports incorporated into that FHR, as well as the release date for the FHR. The lag between the two dates is primarily due to Table 3: Ford Motor Co's FHR Trend and Performance Category Scores, YE 2003 to YE 2011 FHR Report Ford Motor Co, February 24, 2012 the firm's value.¹ The company has a weighted cost of borrowing (WCB) of 0.82%. So, despite the underperformance in generating returns, ROCE has been greater than the WCB through the past four quarters. This generally suggests that management successfully built company value during the period. the time required for the company to release its statements, and then for Rapid Ratings to incorporate the data and generate the FHR. For periods prior to the operation of Rapid Ratings, this lag is assumed to be 60 days for quarterly ratings and 90 days for YE ratings. Annual Quarterly YE 2003 YE 2004 YE 2005 YE 2006 YE 2007 YE 2008 YE 2009 YE 2010 Q1 2011 Q2 2011 Q3 2011 YE 2011 Financial Period End 12/31 12/31 12/31 12/31 12/31 12/31 12/31 12/31 3/31 6/30 9/30 12/31 Financial Health Rating 40 50 30 13 23 13 28 51 65 63 64 68 Annual Delta 10 -20 -17 10 -10 15 23 22 12 12 17 Low Risk (80 – 100) Moderate Risk (60 – 79) Medium Risk (40 – 59) High Risk (20 – 39) Very High Risk (0 – 19) Performance Category Scores Sales Performance 16 16 27 16 27 16 16 5 16 27 27 16 Overall Profitability 36 48 27 7 19 7 23 52 71 70 70 72 Cost Structure 64 66 69 42 49 43 69 54 51 50 51 69 Debt Service Management 80 88 5 5 5 5 5 90 90 90 90 90 Leveraging 5 5 5 5 5 5 5 5 5 5 5 5 Working Capital Efficiency 24 29 25 19 23 23 23 24 25 11 13 23 _____ ¹Formal economic value added analysis compares the DuPont results (ROCE) with the weighted average cost of capital (WACC) including both debt and equity. This analysis utilizes the weighted cost of borrowing (WCB) as it is readily calculated from corporate financials whereas WACC is not. Therefore, as a benchmark, WCB imposes a minimum not a definitive standard. Rapid Ratings | © All rights reserved Rapid Ratings International 2012 Page 3 of 9
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