Ford Motor Company — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Amounts are in U.S. dollars.
Business context and results
Ford reports Automotive, Mobility, and Ford Credit segments. Consolidated revenue declined 3.9% to $40.3 billion, primarily reflecting lower Automotive revenue ($37.2 billion, down from $39.0 billion); Ford Credit revenue rose to $3.1 billion.
- Net income attributable to Ford fell to $1.146 billion from $1.736 billion. Diluted GAAP EPS was $0.29 versus $0.43.
- Management reported adjusted EBIT of $2.4 billion, up $300 million, and adjusted diluted EPS of $0.44, up $0.01. Adjusted EBIT margin was 6.1%, up 0.9 percentage points; GAAP net income margin was 2.8%, down 1.3 points.
- Income before taxes was $1.610 billion, down from $1.919 billion. The income tax provision increased to $427 million from $174 million; the effective tax rate was 26.5%, while the adjusted rate was 19.7%.
- Segment income before taxes: Automotive $2.009 billion; Ford Credit $801 million; Mobility loss $288 million. Ford Credit reported its highest EBT in nearly nine years, with management citing lower lease-vehicle depreciation and improved credit-loss reserves.
Cash flow, liquidity, debt, and balance sheet
- Operating cash flow was $3.544 billion, compared with $3.514 billion. Investing cash outflow narrowed to $1.334 billion from $6.544 billion; financing cash inflow was $1.873 billion versus $2.414 billion.
- Capital spending was $1.633 billion. Cash, cash equivalents, and restricted cash increased to $21.019 billion from $16.907 billion at year-end; marketable securities were $16.882 billion.
- Company cash excluding Ford Credit was $24.2 billion and Company liquidity was $35.2 billion. Ford’s stated targets were at least $20 billion of Company cash and at least $30 billion of Company liquidity.
- Company debt excluding Ford Credit was $14.2 billion; adjusted debt to EBITDA was 3.2x. Ford Credit debt was $142.950 billion. Ford Credit reported $31 billion of net liquidity available for use and managed leverage of 8.8x, within its 8x–9x target range.
- Total assets were $263.3 billion and total liabilities $226.7 billion at March 31. Ford-attributable equity was $36.4 billion, up about $0.5 billion from year-end.
Material changes and unusual items
- Q1 special-item charges were $592 million, mostly related to Europe and South America redesign actions, with about $100 million of negative cash effects. These charges contributed to lower GAAP earnings even as adjusted EBIT improved.
- Ford announced exits or restructurings affecting South American heavy trucks and Russian passenger cars, alongside other global capacity and workforce actions. The company estimated $3 billion–$3.5 billion of 2019 redesign charges and about $11 billion of potential total charges, with approximately $7 billion of total negative cash effects.
- Ford adopted the new lease accounting standard on January 1, 2019, recording operating lease assets and liabilities; adoption increased opening retained earnings by $13 million. Management did not expect a material ongoing net-income impact.
- Automotive and Mobility derivative instruments contributed to a $446 million after-tax loss in other comprehensive income for the quarter, versus a $33 million gain in Q1 2018.
- Ford declared a $0.15-per-share dividend in Q1 2019, compared with $0.28 per share in Q1 2018.
Outlook, risks, and contingencies
- For 2019, Ford expected revenue growth above 2%, adjusted EBIT margin above 4.4%, adjusted ROIC above 7.1%, and adjusted cash conversion above 40%; it expected adjusted EBIT to exceed 2018 and adjusted debt to EBITDA to be higher than 3.2x at year-end.
- Management expected improved Company adjusted operating cash flow and Automotive EBIT. It forecast improvement in China, Europe, and North America, while expecting China to remain loss-making; a larger Mobility loss; and Ford Credit EBT about level with 2018. Ford expected average auction values to decline about 4% at constant mix.
- Ford expected 2019 capital spending to be about the same as 2018 and approximately $7 billion annually through 2022. Full-year shareholder distributions were expected to be $2.6 billion.
- Liquidity actions announced after quarter-end included an amended corporate credit facility and a $3.5 billion supplemental facility. Ford expected to draw the $1.5 billion delayed-draw term loan during 2019.
- Key risks include weaker vehicle demand, pricing and market-share pressure, commodity and currency movements, trade and geopolitical developments, product defects and recalls, pension assumptions, and Ford Credit credit losses, residual values, and funding access.
- Ford disclosed an Italian competition-authority fine of about $50 million, which FCE appealed. A U.S. emissions-certification matter involving road-load estimates was disclosed to regulators and became the subject of a DOJ criminal investigation; Ford said the matter was preliminary and its outcome could not be predicted.
- Ford estimated reasonably possible losses above accruals for indirect tax and customs matters at up to about $600 million, and disclosed a separate emissions matter for which it could not estimate potential loss. It also cited significant litigation involving vehicles with DPS6 transmissions.
Important facts for investors to verify
- Whether adjusted EBIT improvement translates into durable GAAP earnings and cash generation, given lower revenue and significant restructuring charges.
- Actual timing, total cost, and cash impact of the global redesign, including the Brazil and Russia actions.
- Progress against 2019 guidance, especially regional Automotive profitability, Ford Credit auction values, and Mobility investment losses.
- Liquidity and leverage after planned facility draws, debt actions, dividends, and pension funding.
- Developments in the emissions investigation, indirect tax and customs matters, DPS6 litigation, and warranty costs.