Ford Motor Company — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial statements are unaudited. PwC performed a review, not an audit.
Business context and results
Ford reports Automotive and Financial Services (primarily Ford Credit). Third-quarter Automotive results weakened substantially, while Financial Services earnings improved. Automotive results were affected by recall and warranty costs, lower volume in North and South America, exchange effects, and product-launch disruption.
| Metric | Q3 2014 | Q3 2013 | First nine months 2014 | First nine months 2013 |
|---|---|---|---|---|
| Total revenue | $34.920bn | $35.775bn | $108.207bn | $109.347bn |
| Income before tax, GAAP | $1.021bn | $2.091bn | $4.398bn | $6.033bn |
| Net income attributable to Ford | $835m | $1.272bn | $3.135bn | $4.116bn |
| Diluted earnings per share | $0.21 | $0.31 | $0.78 | $1.02 |
| Pre-tax results excluding special items | $1.181bn | $2.589bn | $5.161bn | $7.290bn |
Segment performance and material changes
- Automotive: Q3 pre-tax profit excluding special items and Other Automotive was $686m, down about $1.5bn year over year; operating margin was 2.5%, down 4.5 percentage points. First-nine-month pre-tax profit on the same basis was $3.8bn, down $2.2bn; margin was 4.2%, down 2 percentage points. Higher warranty costs, including recalls, and lower North and South American volume were principal drivers.
- North America: Q3 pre-tax profit was $1.410bn, down $886m. Volume and revenue fell 8% and 6%; five weeks of Dearborn Truck Plant downtime for the F-150 launch and supplier shortages affected deliveries. Ford said the shortages had been resolved.
- South America: Q3 pre-tax loss was $170m; first-nine-month loss was $975m, including $426m of adverse balance-sheet exchange effects. Economic weakness, currency depreciation, import restrictions in Argentina, and constrained Venezuela production weighed on results.
- Europe: Q3 pre-tax loss was $439m, with improving volume and market share offset by Russia, exchange effects, and other factors. Ford continued its restructuring and Genk plant closure.
- Financial Services: Q3 pre-tax income rose to $495m from $363m; first-nine-month income was $1.386bn versus $1.317bn. Ford Credit’s Q3 improvement was principally attributed to higher financing volume.
Cash flow, debt and liquidity
- Consolidated operating cash flow for the first nine months was $12.339bn, compared with $10.129bn a year earlier. Capital spending was $5.309bn, versus $4.659bn; net cash decreased $1.148bn to $13.320bn.
- Automotive operating-related cash flow, a non-GAAP measure, was $3.1bn for the first nine months, down from $5.6bn. Automotive gross cash was $22.8bn and total Automotive liquidity was $33.6bn, including available credit lines. Automotive net cash was $7.9bn.
- Consolidated debt was $119.193bn, versus $114.688bn at year-end 2013, largely reflecting Financial Services funding. Automotive debt was $14.943bn; Financial Services debt was $104.250bn.
- Ford Credit had $27.0bn of net liquidity available for use and managed leverage of 8.5:1 at quarter end. Managed receivables were $110.4bn.
- Ford declared dividends of $0.125 per share for the quarter and repurchased about 116m shares during 2014 for approximately $2bn. First-nine-month cash dividends were $1.470bn.
Outlook, risks and unusual items
- Ford reduced its 2014 full-year pre-tax outlook excluding special items to about $6bn, from the prior $7bn–$8bn range. It continued to expect Automotive revenue about equal to 2013, lower Automotive margin and operating-related cash flow, and Ford Credit pre-tax profit of $1.8bn–$1.9bn.
- For 2015, Ford forecast company pre-tax profit excluding special items of $8.5bn–$9.5bn, with all five Automotive regions expected to improve. The forecast assumes Automotive revenue and margin rise and operating-related cash flow is positive.
- Regional 2014 expectations included North America margin at the low end of 8%–9% and lower profit than 2013; South America loss of about $1bn; Europe loss of about $1.2bn; Middle East & Africa about breakeven; and Asia Pacific profit of about $700m. These are management estimates, not guarantees.
- Q3 included a $245m tax benefit from changes to the tax methodology for Ford Credit’s European operations and Automotive export depreciation. First-nine-month special items included a $329m pre-tax Ford Sollers impairment and $434m of separation-related costs. The impairment reflected Russian market conditions; total estimated U.K. and Genk separation costs were about $1.1bn, excluding approximately $200m pension-related costs.
- Ford cited uncertain conditions in Europe, South America and Russia; foreign-exchange and commodity exposure; recalls and warranty costs; supplier disruption; pension obligations; and Ford Credit credit-loss, vehicle-residual-value, and funding risks. Estimated reasonably possible loss above accruals for material non-pattern matters included indirect tax and customs matters, with aggregate exposure estimated up to about $3bn. Warranty accruals rose to $4.702bn from $3.537bn a year earlier.
- Venezuela’s currency controls constrained parts availability, production, and dollar payments; Ford recorded a $316m remeasurement loss in Q1 2014. The CFPB proposed supervision of large nonbank automotive finance companies, potentially leading to examinations beginning as early as 2015.
Important facts for investors to verify
- Whether the revised approximately $6bn 2014 pre-tax outlook and 2015 $8.5bn–$9.5bn outlook are achieved, and how special items affect comparisons.
- Recall, warranty and field-service-action costs, including the pace of warranty accrual growth and any additional campaign exposure.
- Automotive cash generation, capital spending plans of at least $7.5bn annually, pension contributions, and progress toward the targeted Automotive debt reduction.
- Developments in South America, Europe and Russia, including currency restrictions, exchange losses, industry demand, and restructuring costs.
- Ford Credit’s receivables growth, credit losses, used-vehicle auction values, lease returns, funding access and leverage.
- Potential outcomes of the disclosed tax/customs matters and litigation; the filing states that ultimate losses may exceed accruals and disclosed estimates.