Ford Motor Company — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Amounts are in U.S. dollars; financial statements are unaudited and interim results may not indicate full-year performance. The filing was signed August 6, 2010.
Business context and results
Ford reports Automotive and Financial Services (principally Ford Credit). It completed the sale of Volvo on August 2, 2010, after quarter-end; Volvo was presented as held for sale and excluded from 2010 operating-segment results. Prior-period comparisons were retrospectively revised for the 2010 variable-interest-entity accounting standard.
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Total sales and revenues | $35.067bn | $26.810bn | $66.633bn | $51.200bn |
| Income before income taxes | $2.847bn | $2.241bn | $4.982bn | $0.579bn |
| Net income attributable to Ford | $2.599bn | $2.261bn | $4.684bn | $0.834bn |
| Diluted earnings per share | $0.61 | $0.69 | $1.10 | $0.30 |
| Automotive operating income/(loss) | $2.312bn | ($1.792bn) | $3.847bn | ($4.234bn) |
| Cash from continuing operations | Not separately stated here | Not separately stated here | $6.457bn | $9.367bn |
Automotive sales rose 38% in Q2 to $32.564bn; wholesales increased 27% to 1.517 million units. For the first half, Automotive sales increased 38% to $61.458bn and wholesales increased 31% to 2.862 million. Ford attributed the improvement primarily to higher volume and mix, pricing, currency, and lower costs. Automotive pre-tax income was $1.972bn in Q2 and $3.292bn for the first half. Financial Services pre-tax income was $875 million and $1.690bn, respectively.
Margins, liquidity, debt and balance sheet
- Automotive operating margin was approximately 7.1% in Q2 and 6.3% for the first half, compared with operating losses in the respective 2009 periods.
- First-half consolidated operating cash flow was $6.457bn, down from $9.367bn. Ford’s separate non-GAAP Automotive operating-related cash flow was positive $2.5bn, versus negative $4.8bn in first-half 2009. Automotive capital spending was $1.9bn.
- Automotive gross cash was $21.9bn at June 30, down $3.0bn from year-end 2009. Automotive debt was $27.3bn, producing net debt of $5.4bn, improved from $8.7bn. Automotive liquidity, including available facilities, was $25.4bn.
- Consolidated debt was $117.385bn, down from $131.635bn at year-end. This includes $90.395bn of Financial Services debt. Ford Credit reported debt of $88.5bn in MD&A, down from $96.3bn at year-end.
- Ford Credit had $20.7bn of liquidity available for use, compared with $21.1bn at year-end, and $17.4bn in cash, cash equivalents and marketable securities. Managed leverage improved to 6.6:1 from 7.3:1.
- Total equity remained in deficit at $3.541bn, an improvement from a $7.782bn deficit at year-end. Cash and cash equivalents were $18.322bn consolidated; total assets were $179.750bn.
Material changes and unusual items
- Q2 net income attributable to Ford increased $338 million year over year, while diluted EPS declined from $0.69 to $0.61. First-half Ford-attributable net income rose $3.850bn.
- Comparisons were affected by large prior-year debt-extinguishment gains: Automotive recorded $3.381bn in Q2 2009 and $4.660bn in first-half 2009, versus $49 million in each 2010 period. Total pre-tax special items were a $95 million charge in Q2 2010 versus $2.795bn of income in Q2 2009; first-half totals were $30 million of income versus $3.158bn.
- Ford Credit’s earnings improved as credit-loss provisions and returned-vehicle residual losses declined. First-half charge-offs fell to $219 million from $617 million; the loss-to-receivables ratio declined to 0.49% from 1.15%. Receivables and lease investments also declined, partly reflecting lower average receivables and the transition of financing for certain brands.
- Ford repaid Note A to the UAW Retiree Medical Benefits Trust and purchased its remaining principal, retiring the note; it also made scheduled Note B payments. Ford paid $255 million of previously deferred interest on subordinated convertible debentures and resumed quarterly interest payments.
- The $15.7bn valuation allowance against deferred tax assets remained substantial despite first-half profitability. Ford stated that sustained North American profitability would be required before it would reconsider the full valuation allowance on relevant deferred tax assets.
Outlook, commentary and risks
Management said it was on track for solid 2010 profits and positive Automotive operating-related cash flow, with first-half results expected to exceed second-half results because of seasonality, shutdowns, product launches, higher investment and costs, and smaller expected Ford Credit reserve and depreciation improvements. Full-year 2010 U.S. industry volume was forecast at 11.5–12.0 million units and European volume at 14.5–15.0 million. Ford expected about $1bn higher Automotive structural costs and about $1bn higher commodity costs year over year, and approximately $4.5bn in capital spending. It expected Ford Credit’s full-year profit to exceed 2009, but second-half profit to be below first-half profit.
For 2011, management expected improved company profitability and Automotive operating-related cash flow, continued Ford Credit profitability at a lower level than 2010, and a move from Automotive net debt to net cash by year-end. These are forward-looking expectations, not guarantees.
Key risks include weak or declining vehicle demand and market share, pricing competition, commodity and currency volatility, supplier distress or production disruption, pension and postretirement obligations, product defects and recalls, regulation and litigation, and high Automotive debt. Ford Credit cited dependence on securitization and capital markets, refinancing and committed-facility risks, regulatory uncertainty following the Dodd-Frank Act, credit losses, and lower lease residual values. Ford noted uncertainty around future U.S. public asset-backed securities requirements after temporary SEC relief expires in January 2011. The Volvo sale’s final purchase-price adjustments were pending and expected to yield additional proceeds; the filing does not provide a final amount.
Other notable items: Ford discontinued the Mercury brand, with $247 million of first-half costs for Mercury discontinuation and U.S. dealer reductions, and expected further charges in 2010–2011. The secured credit agreement and DOE loan arrangements include liquidity requirements of at least $4bn; the credit agreement also restricts dividends and includes borrowing-base and default provisions. Interim statements received a review by PwC, not a full audit.
Investor facts to verify
- Whether subsequent quarters deliver the forecast positive Automotive cash flow, 2010 profits, and 2011 net-cash target, given seasonal and commodity-cost pressures.
- How much of earnings improvement reflects sustainable vehicle operations versus lower Ford Credit credit-loss and residual-loss provisions, and prior-year unusual debt gains.
- Ford Credit’s continued access to securitization, committed liquidity and debt markets, especially as regulatory requirements change.
- Progress in reducing Automotive debt and the effect of Note B payments, potential stock settlement, and the Volvo sale’s final proceeds and adjustments.
- Whether profitability supports any future change in the deferred-tax valuation allowance, and how pension obligations and the continuing equity deficit affect financial flexibility.