Ford Motor Company — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Interim financial statements are unaudited; PwC performed a review, not an audit. Ford reports Automotive and Financial Services sectors.
Financial performance and position
- Q2 revenue: $37.4 billion, down from $37.9 billion a year earlier. Automotive revenue was $35.4 billion (vs. $36.1 billion); Financial Services revenue was $2.0 billion (vs. $1.8 billion).
- Q2 earnings: Pretax income was $2.12 billion including $481 million of special-item charges; excluding special items, pretax results were $2.60 billion, up $44 million year over year. Net income attributable to Ford was $1.31 billion, or $0.32 diluted per share, versus $1.23 billion, or $0.30.
- First-half earnings: Revenue was $73.3 billion versus $73.6 billion. Pretax income was $3.38 billion including $603 million of special-item charges; excluding special items, it was $3.98 billion, down $721 million year over year. Ford-attributable net income was $2.30 billion versus $2.84 billion; diluted EPS was $0.57 versus $0.70.
- Sector results: Q2 Automotive pretax income was $1.69 billion reported and $2.17 billion excluding special items; Financial Services pretax income was $429 million. Automotive operating margin was 6.6% in Q2 and 5.0% for the first half; first-half Automotive pretax income was $2.49 billion, down from $2.99 billion.
- Cash flow: First-half consolidated operating cash flow was $6.97 billion, up from $6.29 billion. Automotive operating-related cash flow, Ford’s non-GAAP measure, was $3.8 billion versus $4.0 billion. Capital spending was $3.43 billion versus $3.08 billion.
- Liquidity and debt: At June 30, consolidated cash and cash equivalents were $11.6 billion and marketable securities were $24.1 billion. Automotive gross cash was $25.8 billion, net cash $10.4 billion, and total Automotive liquidity $36.7 billion, including available credit. Consolidated debt was $118.7 billion, of which $103.3 billion was Financial Services debt and $15.4 billion Automotive debt. Ford Credit managed leverage was 8.6:1.
- Other balance-sheet measures: Total assets were $210.9 billion and equity attributable to Ford was $26.8 billion. Inventories rose to $9.4 billion from $7.7 billion at year-end 2013. Declared dividends were $0.125 per share for Q2.
Material changes versus comparable periods
- Q2 reported Ford-attributable net income improved by $78 million, while first-half net income fell $544 million. First-half pretax income excluding special items declined, despite the modest Q2 year-over-year increase.
- Q2 Automotive pretax income increased $66 million year over year; North America posted a record quarterly profit of $2.4 billion. South America’s loss widened to $295 million, while Europe returned to a small quarterly profit of $14 million and Asia Pacific reached a record Q2 profit of $159 million.
- Financial Services Q2 pretax income decreased to $429 million from $451 million, principally reflecting higher insurance losses from storm damage to dealer inventory and weaker lease-residual performance.
- Automotive gross cash increased $1.0 billion from year-end, while consolidated cash and cash equivalents declined $2.9 billion. Ford repurchased 57.6 million shares in Q2 for an average $16.58 per share.
Outlook, commentary, risks and unusual items
- Company outlook: Ford maintained 2014 pretax profit guidance of $7–$8 billion excluding special items and an approximately 35% effective tax rate, assuming retroactive extension of the U.S. research credit. It expects Automotive revenue about equal to 2013, a lower Automotive operating margin, and lower Automotive operating-related cash flow. Planned capital spending is about $7.5 billion.
- Regional and Ford Credit outlook: North America pretax profit expected below 2013, with an 8%–9% margin. South America’s expected loss was increased. Europe results are expected to improve from 2013, with profitability targeted for 2015; Middle East & Africa is expected around breakeven. Asia Pacific and Ford Credit are expected to earn higher pretax profits than in 2013. Ford Credit year-end managed receivables guidance increased to $112–$115 billion; managed leverage guidance remains 8:1–9:1.
- Key operating factors: Ford cited global product launches and investment, planned F-150 changeover downtime, weak South American conditions and currency volatility, and uncertainty in Russia. Management expects the 2014 launches and investments to support stronger volumes, revenue, and margins in 2015 and beyond.
- Unusual charges and exposures: A $329 million noncash impairment was recorded for Ford Sollers amid weaker Russian market conditions and lower expected cash flows. Venezuela’s exchange-rate change generated a $316 million first-quarter remeasurement loss; currency controls also constrained production and dollar payments. European facility separation costs were estimated at about $1 billion, excluding approximately $200 million of pension-related costs. The warranty accrual rose to $4.52 billion, including $763 million of changes related to pre-existing warranties in the first half.
- Legal and other contingencies: Ford estimated reasonably possible loss in excess of accruals for material matters at up to approximately $3.2 billion, primarily indirect tax and customs matters. The filing also describes product, regulatory, employment, environmental, and other litigation, and guarantees with maximum potential payments of $637 million. Outcomes may exceed recorded accruals.
- Principal risks: Industry demand and market-share changes, product acceptance and recalls, foreign exchange and commodity movements, supplier or production disruptions, pension obligations, regulation and litigation, and Ford Credit funding access, credit losses, and lease residual values.
- Other notable developments: Ford adopted a service-accrual method for disability benefits retrospectively; the filing says interim income and cash-flow effects were immaterial. A new revenue-recognition standard effective in 2017 was under assessment. CEO Mark Fields succeeded Alan Mulally effective July 1, 2014.
Important facts for investors to verify
- Reconcile reported earnings with results excluding special items, especially the Sollers impairment and European separation costs.
- Track South America losses, currency restrictions and devaluation exposure, and Russia-related assumptions behind the Sollers valuation.
- Monitor warranty accrual development, vehicle recall costs, and the increase in charges for pre-existing warranties.
- Assess the quality and sustainability of Automotive cash generation against planned investment, pension contributions, share repurchases, and debt reduction.
- Review Ford Credit’s lease residual assumptions, insurance losses, liquidity and leverage, and the risks and limits attached to securitization funding.
- Follow the status and potential cash impact of tax/customs claims and other contingencies; the stated possible-loss estimate is not a prediction of the ultimate outcome.