Ford Motor Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. Financial statements are unaudited and were reviewed, not audited, by PwC. Ford operates Automotive and Financial Services sectors.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $35.9 billion | $35.6 billion |
| Income before tax, reported | $1.259 billion | $2.123 billion |
| Pre-tax results excluding special items | $1.381 billion | $2.146 billion |
| Net income attributable to Ford | $989 million | $1.611 billion |
| Diluted EPS | $0.24 | $0.40 |
| Cash dividends declared per share | $0.125 | $0.10 |
| Cash from operating activities, consolidated | $2.220 billion | $211 million |
Automotive revenue was nearly flat at $33.876 billion. Automotive pre-tax profit excluding special items was $919 million, down $724 million; operating margin was 3.4%, down 1.8 percentage points. Financial Services pre-tax profit was $462 million, versus $503 million. Ford reported total special-item costs of $122 million, primarily separation costs.
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $13.0 billion, marketable securities $23.5 billion, total assets $207.1 billion, and total equity $26.8 billion.
- Total debt was $117.0 billion, up from $114.7 billion at year-end 2013. This includes substantial Financial Services funding debt; Automotive debt was $15.7 billion.
- Automotive gross cash was $25.2 billion; Automotive net cash was $9.5 billion. Automotive liquidity, including available credit lines, was $36.6 billion.
- Ford Credit managed receivables were $106.5 billion and available liquidity was $22.6 billion. Managed leverage was 8.6:1.
- Automotive operating-related cash flow, Ford’s non-GAAP measure, was $1.2 billion, compared with $0.7 billion. Automotive capital spending was $1.5 billion in the quarter.
Material changes and management commentary
- Reported pre-tax profit fell $864 million year over year. Management attributed the decline principally to lower North and South America Automotive results; improvement in other Automotive regions partly offset the decline.
- Management identified approximately $900 million of unusual adverse factors: about $400 million of higher North America warranty reserves and about $100 million of winter-related premium freight and labor costs, plus approximately $400 million of South America currency-related balance-sheet impacts. These factors reduced pre-tax profit by an estimated $0.17 per share.
- South America recorded a $316 million Venezuela currency remeasurement loss after Ford changed the rate used to 10.8 bolivars per U.S. dollar. The filing warns that currency controls and further devaluation could cause additional losses and disrupt production, parts supply, and remittances.
- Regional results were mixed: North America earned $1.5 billion pre-tax; South America lost $510 million; Europe lost $194 million; Middle East & Africa earned $54 million; and Asia Pacific earned a record $291 million for the region.
- Ford adopted service-accrual accounting for disability benefits from January 1, 2014 and retrospectively applied the change. It reduced equity by $271 million at December 31, 2013; the Q1 2014 income-statement and cash-flow effects were immaterial.
Outlook, risks, and contingencies
- Ford maintained its 2014 company pre-tax profit outlook, excluding special items, of $7–$8 billion; Automotive revenue is expected to be about level with 2013, while Automotive operating margin and operating-related cash flow are expected to be lower. Full-year effective tax rate guidance was about 35%.
- North America: full-year pre-tax profit expected below 2013, with an 8%–9% operating margin. South America is expected to incur a larger full-year loss than in 2013, with the remainder of the year about breakeven to a small loss.
- Europe results are expected to improve in 2014, with profitability targeted for 2015. Middle East & Africa is expected to be about breakeven. Asia Pacific profit is now expected to be higher than 2013.
- Ford Credit full-year pre-tax profit was expected to be about equal to or higher than 2013. Ford expected year-end managed receivables of about $110 billion and managed leverage of 8:1 to 9:1.
- Ford planned approximately $7.5 billion of annual capital spending, up from $6.6 billion in 2013, and expected $1.9 billion of 2014 pension contributions and unfunded-plan payments.
- On April 30, 2014, after quarter-end, Ford amended its revolving credit facility, increasing commitments to $12.2 billion. Ford Credit was allocated up to $2 billion of that capacity.
- Ford estimated reasonably possible losses above accruals for material non-pattern legal matters at up to approximately $3 billion, related to indirect tax and customs matters. Guarantees and limited indemnities had maximum potential payments of $652 million, with $4 million of recorded liabilities. Warranty accruals were $4.299 billion at quarter-end; Q1 additions for pre-existing warranties were $456 million, versus $7 million in Q1 2013.
- Key risks include recalls and warranty costs, foreign exchange and emerging-market volatility, industry demand and pricing, supplier disruption, pension obligations, litigation and regulation, and Ford Credit credit-loss, lease-residual, and funding risks.
Most important facts for investors to verify
- Whether the roughly $900 million of identified unusual costs and currency effects are isolated or recur, particularly warranty/recall trends and South America exposures.
- Progress toward the $7–$8 billion full-year pre-tax target and regional outlooks, including North America margin and South America losses.
- Ford Credit’s receivables growth, lease auction values and residual assumptions, credit-loss trends, leverage, and funding liquidity.
- Cash deployment against planned capital spending, pension contributions, debt reduction, and the dividend; distinguish Automotive liquidity from Financial Services funding.
- Developments in the estimated up-to-$3 billion possible legal exposure, warranty reserves, and Venezuela currency controls and pending foreign-exchange requests.