Ford Motor Company — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Figures are in U.S. dollars; financial statements are unaudited interim statements reviewed by the independent accountant, not audited.
Business context and key financial metrics
Ford operates Automotive and Financial Services sectors, including Ford Credit. Q2 results weakened year over year, principally because of lower Automotive performance in Europe and higher costs; North America remained profitable.
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $33.2 billion | $35.5 billion | $65.7 billion | $68.6 billion |
| Pre-tax income | $1.6 billion | $2.6 billion | $3.6 billion | $5.4 billion |
| Net income attributable to Ford | $1.04 billion | $2.40 billion | $2.44 billion | $4.95 billion |
| Diluted earnings per share | $0.26 | $0.59 | $0.61 | $1.20 |
| Operating cash flow, consolidated | Not presented by quarter in the supplied filing text | $5.98 billion | $6.23 billion |
Automotive pre-tax operating profit, excluding special items, was $1.4 billion in Q2 and $3.2 billion for the first half, versus $2.3 billion and $4.4 billion, respectively, in 2011. First-half Automotive operating margin was 5.6%; the filing text does not provide a clear Q2 margin value. Ford Credit earned $447 million pre-tax in Q2 and $903 million in the first half.
At June 30, 2012, consolidated cash and cash equivalents were $15.1 billion, marketable securities $20.5 billion, and total debt $99.9 billion. Automotive gross cash was $23.7 billion, Automotive net cash $9.5 billion, and Automotive liquidity $33.9 billion, including available credit lines. Ford Credit reported $21.6 billion of liquidity available for use. Consolidated cash declined $2.0 billion during the first half.
Material changes versus comparable periods
- Q2 revenue fell about 7% and Ford-attributable net income fell about 57% year over year. First-half revenue and net income also declined.
- Management attributed the earnings decline mainly to weaker operating results and higher tax expense; 2011 comparisons benefited from a tax valuation allowance release in Q4 2011.
- Automotive Q2 pre-tax operating profit declined about $0.9 billion year over year. Management cited product and capacity launch costs, growth investment, higher commodity costs, weaker market factors, and unfavorable exchange.
- Ford Europe moved from a Q2 pre-tax profit in 2011 to a $404 million loss in Q2 2012. Ford South America profit declined to $5 million; Asia Pacific Africa recorded a $66 million loss.
- Ford North America Q2 pre-tax profit rose to $2.0 billion from $1.9 billion, although U.S. market share fell to 15.6% from 17.3%.
- Ford Credit pre-tax profit declined to $447 million from $604 million, mainly due to fewer profitable lease terminations and lower financing margin.
Outlook, commentary, risks and unusual items
- Ford lowered its full-year Automotive outlook: pre-tax operating profit and operating margin expected about equal to or below 2011; total-company pre-tax operating profit expected strong but below 2011. It maintained expectations for positive full-year Automotive operating-related cash flow and less than $2 billion in Automotive structural cost increases.
- Management expected Ford Europe’s full-year loss to exceed $1 billion, citing deteriorating market conditions and structural industry challenges. South America was still expected to be profitable, but substantially less profitable than in 2011. North America outlook remained for significantly higher full-year pre-tax profit; Asia Pacific Africa results were expected to improve in the second half.
- Ford Credit maintained its outlook for about $1.5 billion full-year pre-tax profit and $500 million–$1 billion of distributions. Its managed leverage target was revised to 8–9:1 from 10–11:1; the lower leverage plan reduced its mid-decade ROE outlook from low double digits to high single digits.
- Full-year capital spending was expected to be about $5 billion, down from the prior plan of $5.5–$6 billion. Expected 2012 Automotive net interest expense was $500–$550 million.
- Special items included $173 million of losses on the sale of two component businesses, plus personnel and dealer-related charges. The sales also involved assumed supplier-pricing obligations of $197 million over the respective contract terms.
- Ford contributed about $1.9 billion to funded pension plans in the first half and expected total 2012 pension contributions and direct benefit payments of about $3.8 billion.
- Material exposures include litigation and claims; Ford estimated reasonably possible loss in excess of accruals for material matters at up to about $2.3 billion, primarily non-U.S. indirect tax matters. Brazilian state tax assessments could require significant cash or collateral to appeal. The filing also identifies foreign-exchange, commodity, credit, residual-value, pension, regulatory, supplier and European-market risks.
- Ford’s long-term senior unsecured debt was upgraded by Moody’s to investment grade in May 2012; the collateral securing Ford’s revolving credit agreement was subsequently released. The DOE advanced-vehicle loan facility was fully drawn by August 1, 2012.
Most important facts for investors to verify
- Whether European restructuring and market developments contain the projected full-year regional loss below or above $1 billion.
- Whether North America earnings can offset deterioration in Europe and South America, and whether market-share trends stabilize.
- Automotive operating-related cash generation, gross cash, available liquidity, and the effects of pension funding and investment spending.
- Ford Credit’s financing margins, credit losses, lease residual values, funding access, leverage and planned distributions.
- Developments in Brazilian tax assessments and other litigation, including potential cash or collateral requirements beyond recorded accruals.
- Execution of component-business transition agreements and the related assumed purchase-pricing obligations.