Ford Motor Company — Q1 2018 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2018, compared with Q1 2017. Ford reports Automotive, Mobility and Ford Credit segments; segment presentation changed in 2018, with prior periods adjusted retrospectively. PwC performed a review, not an audit, of the interim statements.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $42.0 billion | $39.1 billion |
| Income before tax | $1.919 billion | $2.251 billion |
| Net income attributable to Ford | $1.736 billion | $1.592 billion |
| Diluted EPS | $0.43 | $0.40 |
| GAAP operating cash flow | $3.514 billion | $4.336 billion |
| Cash dividends declared per share | $0.28 | $0.20 |
- Revenue increased 7%, reflecting higher consolidated volume, favorable exchange effects and higher net pricing. Wholesale volume was 1.7 million units, down 2%; consolidated-operation volume rose about 3%.
- Company adjusted EBIT was $2.2 billion, down $335 million; adjusted EBIT margin was 5.2%, down 1.2 percentage points. Adjusted EPS was $0.43.
- Automotive EBIT was $1.7 billion, down $443 million. Higher commodity costs (about $480 million) and adverse exchange effects (about $240 million) were partly offset by pricing and volume. Costs excluding commodities were approximately flat.
- Ford Credit earned $641 million, up $160 million. Mobility recorded a $102 million loss, including a one-time investment gain of about $58 million.
- Effective tax rate was 9.1%, including a $235 million benefit from non-U.S. capital loss carryforwards expected to be realized. Management said the net-income increase was more than explained by the lower tax rate.
- At March 31, cash and cash equivalents were $17.9 billion and marketable securities were $22.1 billion. Ford’s Company cash excluding Ford Credit was $27.6 billion; Company liquidity was $38.6 billion.
- Automotive debt was $15.8 billion; Company debt excluding Ford Credit was $16.4 billion. Ford Credit debt was $141.9 billion. Ford Credit managed leverage was 8.4:1, within its 8:1–9:1 target.
- Total assets were $267.2 billion and total equity was $36.4 billion. The Company pension underfunded balance was $6.3 billion.
Changes, outlook and key commentary
- Despite higher revenue and net income, pre-tax income declined and adjusted EBIT and margin were lower year over year. Management attributed the earnings-per-share increase principally to tax effects.
- Company operating cash flow, a non-GAAP measure, was about $3 billion, up about $1 billion year over year, mainly due to higher Ford Credit distributions. Capital spending was $1.8 billion in the quarter.
- Management’s 2018 guidance: revenue modestly above 2017; adjusted EPS of $1.45–$1.70; positive Company operating cash flow about equal to 2017; adjusted tax rate about 15%; pension contributions about $500 million; and capital spending about $7.5 billion.
- Management expected lower full-year North America EBIT due to commodities and growth spending; a second-quarter Asia Pacific loss, with profits expected in the second half; improved Europe EBIT; and Ford Credit EBT flat to lower than 2017 amid pressure on financing margins. Full-year auction values were expected to decline slightly.
- Ford expected 2018 shareholder distributions of about $3 billion. Q1 distributions were about $1.2 billion, including a supplemental dividend of about $500 million. Company cash target was about $20 billion; management said liquidity was sufficient for planned investment, obligations and the regular dividend.
- Material exposures include litigation and claims; the estimated aggregate reasonably possible loss above accruals for identified indirect tax and customs matters was up to about $700 million. Total guarantee maximum potential payments were $1.558 billion, with $447 million of recorded liabilities. Warranty and field-service obligations were $5.156 billion.
- Principal risks cited include weaker vehicle demand, market-share and pricing pressure, commodity and currency swings, trade and geopolitical disruption, product defects and recalls, regulation, pension assumptions, cyber incidents, and Ford Credit funding, credit-loss and vehicle-residual risks.
- Accounting changes: U.S. inventory accounting moved from LIFO to FIFO retrospectively, with an immaterial Q1 income-statement effect. Ford anticipated the 2019 lease standard would add $1.5–$2.0 billion of right-of-use assets and lease liabilities; the expected credit-loss standard was expected to increase Ford Credit’s balance-sheet allowance.
Investor verification priorities
- Reconcile reported GAAP cash flow with management’s non-GAAP Company operating cash flow and confirm the contribution from Ford Credit distributions and working-capital timing.
- Assess the sustainability of adjusted EBIT, regional performance and the 2018 guidance, particularly commodity costs, China/Asia Pacific losses and Europe pricing assumptions.
- Review the $235 million tax benefit and its effect on reported earnings and compare the Q1 tax rate with the full-year adjusted-rate guidance.
- Monitor Ford Credit receivables, credit-loss allowance, auction/residual values, funding needs and managed leverage; Ford Credit receivables are not equivalent to unrestricted Company liquidity.
- Evaluate liquidity and debt by business, pension funding needs, and possible cash requirements from litigation, guarantees, warranties and recalls.