Business context and reporting period
Ford Motor Company’s Form 10-K covers the fiscal year ended December 31, 2010; it is an annual filing, not a standalone fourth-quarter report. Ford reports Automotive and Financial Services sectors. The filing presents 2009 as the principal comparable year and retrospectively applies a 2010 accounting change for variable-interest-entity consolidation.
Ford sold approximately 5.524 million vehicles wholesale worldwide. During 2010 it completed the sale of Volvo, discontinued Mercury at year-end, and reduced its Mazda ownership to about 3.5%.
Financial performance and position
| Metric | 2010 | 2009 |
|---|---|---|
| Total sales and revenues | $128.954 billion | $116.283 billion |
| Income before income taxes | $7.149 billion | $2.599 billion |
| Net income attributable to Ford | $6.561 billion | $2.717 billion |
| Diluted earnings per share | $1.66 | $0.86 |
| Automotive sales | $119.280 billion | $103.868 billion |
| Automotive operating income/(loss) | $5.789 billion | $(3.352) billion |
| Automotive income before taxes | $4.146 billion | $0.785 billion |
| Financial Services income before taxes | $3.003 billion | $1.814 billion |
Automotive GAAP operating margin was approximately 4.9% (operating income divided by Automotive sales). The outlook table separately reports a 6.1% 2010 Automotive operating margin under the company’s stated operating metric; investors should check its reconciliation to reported results.
Consolidated cash provided by operating activities was $11.477 billion, versus $15.477 billion in 2009; capital expenditures were $4.092 billion. Automotive-sector cash from operating activities was $6.363 billion. Ford’s non-GAAP Automotive operating-related cash flow was $4.4 billion, compared with negative $0.8 billion in 2009.
At year-end, Automotive gross cash was $20.5 billion and Automotive debt was $19.1 billion, yielding $1.4 billion of Automotive net cash, versus $8.7 billion of net debt a year earlier. Automotive liquidity, including available credit lines, was $27.9 billion. Total company debt was $103.988 billion, including $19.077 billion Automotive and $85.112 billion Financial Services debt. Total equity remained negative at $642 million, an improvement from a $7.782 billion deficit.
Material changes versus 2009
- Revenue rose about 11%, driven mainly by higher Automotive volumes and favorable net pricing; Automotive wholesales increased 14% to 5.524 million units.
- Automotive results improved substantially, with North America pre-tax income of $5.409 billion versus a $639 million loss. Ford Credit’s pre-tax income rose to $3.054 billion from $2.001 billion, primarily due to lower credit-loss provisions and improved lease residual performance.
- Ford reduced Automotive debt by $14.5 billion, including repayment of revolving borrowings and prepayment of its UAW VEBA notes. Automotive gross cash declined $4.4 billion, in part reflecting these debt repayments and other uses.
- Ford Credit managed receivables declined to $83.2 billion from $94.5 billion. Its managed loss-to-receivables ratio improved to 0.47% from 1.07%.
- Net special items were a $1.151 billion pre-tax charge in 2010, compared with a $2.561 billion benefit in 2009. The 2010 total included a $962 million loss on convertible-note exchanges; 2009 included significant debt-extinguishment gains.
Outlook, commentary, risks and contingencies
Management expects 2011 total-company pre-tax operating profit and Automotive operating-related cash flow to improve, each operating segment to be profitable, and total Automotive and Ford North America operating margins to be equal to or higher than 2010. Planned 2011 capital spending is $5.0–$5.5 billion. Ford’s 2011 industry-volume assumptions are 13.0–13.5 million units in the U.S. and 14.5–15.5 million in the 19 tracked European markets. Planned first-quarter 2011 production is 1.447 million vehicles.
Ford expects Ford Credit to remain profitable in 2011, but at a lower level than in 2010. Management estimates that reduced lease-depreciation benefits and smaller credit-loss reserve releases could lower Ford Credit pre-tax profit by about $1.2 billion year over year. Ford expects about $1.6 billion of 2011 pension contributions and benefit payments, and a moderate increase in pension expense. Management also said the deferred-tax valuation allowance could be largely reversed as early as the second half of 2011 if profitability is sustained; such a reversal would increase reported earnings but not cash tax payments.
Key risks include volatile vehicle demand, intense competition and industry overcapacity, commodity and fuel prices, foreign-exchange and interest-rate movements, supplier capacity or distress, labor negotiations, product quality and recalls, and increasingly stringent safety, emissions and fuel-economy rules. Ford disclosed global defined-benefit pension underfunding of $11.5 billion and significant reliance on debt and securitization markets, particularly at Ford Credit.
Contingencies include Brazilian tax disputes: a state-incentive matter has a reasonably possible loss of up to approximately $500 million, including interest and penalties, for which Ford had not accrued a liability. A separate federal tax-incentive ruling was under appeal. Ford also described asbestos claims, environmental matters and class actions; outcomes and potential exposure are uncertain. Management identified no material weakness in internal control, and the independent auditor gave an unqualified opinion on the financial statements and internal control.
Most important facts for investors to verify
- Reconcile the outlook’s stated 6.1% Automotive operating margin with reported Automotive operating income and the stated margin definition.
- Assess the sustainability of 2010 earnings and cash generation, including the effects of special items, debt transactions, working capital and Ford Credit reserve releases.
- Monitor Automotive liquidity and debt maturities, collateral and covenant requirements, and Ford Credit’s funding renewals; about 69% of Ford Credit’s committed capacity was due for renewal in 2011.
- Review pension funding assumptions and contributions, and the conditions required for any deferred-tax valuation-allowance reversal.
- Track outcomes of the Brazilian tax proceedings, product-recall and warranty exposure, and regulatory requirements that could affect cost, product mix or sales.
- Consider the effects of the Volvo sale, Mercury discontinuation, Mazda stake reduction and retrospective VIE accounting changes when comparing periods.