Ford 2006 Annual Report Download - page 12
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Please find page 12 of the 2006 Ford annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Generation of Revenue, Income and Cash
Our Automotive sector's revenue, income and cash are generated primarily from sales of vehicles to our dealers and
distributors (i.e., our customers). Vehicles we produce generally are subject to firm orders from our customers and are
deemed sold (with the proceeds from such sale recognized in revenue) immediately after they are produced and shipped
to our customers. This is not the case, however, with respect to vehicles produced for sale to daily rental car companies
that are subject to a guaranteed repurchase option or vehicles produced for use in our own fleet (including management
evaluation vehicles). Vehicles sold to daily rental car companies that are subject to a guaranteed repurchase option are
accounted for as operating leases, with lease revenue and profits recognized over the term of the lease. When we sell
the vehicle at auction, we recognize a gain or loss on the difference, if any, between actual auction value and the
projected auction value. In addition, revenue for finished vehicles we sell to customers or vehicle modifiers on
consignment is not recognized until the vehicle is sold to the ultimate customer. Therefore, except for the impact of the
daily rental units sold subject to a guaranteed repurchase option, those units placed into our own fleet, and those units for
which recognition of revenue is otherwise deferred, wholesale volumes to our customers and revenue from such sales are
closely linked with our production.
Most of the vehicles sold by us to our dealers and distributors are financed at wholesale by Ford Motor Credit
Company ("Ford Credit"). Upon Ford Credit originating the wholesale receivable related to a dealer's purchase of a
vehicle, Ford Credit pays cash to the relevant legal entity in our Automotive sector in payment of the dealer's obligation for
the purchase price of the vehicle. The dealer then pays the wholesale finance receivable when it sells the vehicle to a
retail customer.
Our Financial Services sector's revenue is generated primarily from interest on finance receivables, net of certain
deferred origination costs that are included as a reduction of financing revenue, and such revenue is recognized over the
term of the receivable using the interest method. Also, revenue from operating leases, net of certain deferred origination
costs, is recognized on a straight-line basis over the term of the lease. Income is generated to the extent revenues
exceed expenses, most of which are interest, depreciation and operating expenses.
Transactions between our Automotive and Financial Services sectors occur in the ordinary course of business. For
example, Ford Credit receives interest supplements and other support cost payments from the Automotive sector in
connection with special vehicle financing and leasing programs that it sponsors. Ford Credit records these payments as
revenue, and our Automotive sector makes the related cash payments, over the expected life of the related finance
receivable or operating lease. See Note 1 of the Notes to the Financial Statements for a more detailed discussion of
transactions and payments between our Automotive and Financial Services sectors. The Automotive sector records the
estimated costs of marketing incentives, including dealer and retail customer cash payments (e.g., rebates) and costs of
special financing and leasing programs, as a reduction to revenue. These reductions to revenue are accrued at the later
of the date the related vehicle sales to the dealer are recorded or at the date the incentive program is both approved and
communicated.
Key Economic Factors and Trends Affecting the Automotive Industry
Excess Capacity. According to CSM Worldwide, an automotive research firm, in 2006 the estimated automotive
industry global production capacity for light vehicles (about 79 million units) significantly exceeded global production of
cars and trucks (about 65 million units). In North America and Europe, the two regions where the majority of revenue and
profits are earned in the industry, excess capacity was an estimated 16% and 14%, respectively. According to production
capacity data projected by CSM Worldwide, global excess capacity conditions could continue for several more years, with
planned capacity reductions announced by us and General Motors Corporation offset by increases in capacity additions in
Asia Pacific markets.
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