Ford Motor Company — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009. Financial statements are unaudited; the auditor performed an interim review, not an audit. Amounts below are U.S. dollars.
Business context and key results
Ford operates Automotive and Financial Services businesses. The quarter’s reported profit was driven chiefly by large gains from debt reduction, despite sharply lower vehicle sales and an Automotive operating loss.
- Q2 revenue: $27.2 billion, down 34% from $41.1 billion in Q2 2008. Automotive sales were $24.0 billion, down 35%; Financial Services revenue was $3.2 billion, down 21%.
- Q2 net income attributable to Ford: $2.261 billion, or $0.69 diluted per share, versus a loss of $8.697 billion, or $3.89 per share, a year earlier. Q2 pretax income was $2.371 billion.
- First-half revenue: $52.0 billion, versus $84.4 billion in the first half of 2008. First-half net income attributable to Ford was $834 million, or $0.30 diluted per share, versus a loss of $8.627 billion, or $3.90 per share.
- Operating performance: Automotive reported a Q2 operating loss of $1.568 billion and first-half operating loss of $3.906 billion. Q2 Automotive pretax income of $1.776 billion included substantial non-operating debt-extinguishment gains. Financial Services pretax income was $595 million for Q2 and $443 million for the first half.
- Cash flow: Consolidated operating cash flow from continuing operations was $9.779 billion in the first half, compared with $2.161 billion in 2008. The filing explains that consolidated presentation includes reclassifications of wholesale and finance-receivable cash flows. Automotive sector operating cash flow was negative $2.170 billion; Ford’s non-GAAP Automotive operating-related cash flow was negative $4.7 billion.
- Liquidity and debt: Automotive gross cash was $21.0 billion at June 30, versus $13.4 billion at year-end 2008; Automotive net debt was $5.1 billion, versus $10.8 billion. Consolidated debt was $133.1 billion, down from $152.6 billion. Ford reported a consolidated equity deficit of $9.4 billion, including a $10.7 billion deficit attributable to Ford Motor Company.
- Credit quality: Ford Credit’s first-half charge-offs were $617 million versus $475 million; its loss-to-receivables ratio rose to 1.15% from 0.67%. Its allowance for credit losses was $1.846 billion, or 1.81% of receivables, versus 1.40% at year-end.
Material changes versus prior comparable periods
- Automotive sales fell 35% in Q2; wholesale unit volume fell 27%. First-half Automotive sales declined 40% and wholesale volume fell 33%. Ford cited lower industry volume, unfavorable mix and the absence of Jaguar Land Rover sales.
- The Q2 earnings swing versus 2008 primarily reflects the absence of the prior-year $5.3 billion North America asset impairment and $2.1 billion Ford Credit lease impairment, plus $3.4 billion of Q2 2009 net debt-reduction gains. Favorable costs and pricing were partly offset by weaker volume and mix.
- Ford Credit receivables and operating-lease investments declined from year-end as lower sales and dealer stocks, and the shift of Jaguar, Land Rover and Mazda financing to other providers, reduced its portfolio.
- Ford’s Q2 share issuance and convertible-note exchange expanded the share base: it issued 345 million common shares in May for about $1.6 billion gross proceeds and exchanged $4.3 billion principal of convertible notes for about 468 million shares plus cash.
Outlook, commentary, risks and unusual items
- Ford forecast 2009 U.S. industry sales of 10.5–11.0 million units and sales in its 19 tracked European markets of 15.0–15.5 million. It expected global industry volume to fall about 10% versus 2008.
- Management expected 2009 Automotive structural-cost reductions to exceed $4 billion and full-year Automotive operating-related cash outflows to improve significantly from 2008. It cautioned that Q3 cash outflow might not improve sequentially.
- Ford stated it was on track for total-company and Ford North America pretax results, and Automotive operating-related cash flow, to reach at least breakeven in 2011, excluding specified special items.
- Ford Credit expected lower second-half pretax profit than in the first half, citing declining receivables and a likely non-recurrence of Q2 currency gains and improved lease-residual results. It planned 2009 funding of $17–20 billion in public term funding and $5–10 billion in private term funding; substantial funding depended on securitization programs, including government-sponsored programs.
- Ford said it had sufficient liquidity under its planning assumptions and concluded there was no substantial doubt about its ability to continue as a going concern. It identified lower-than-forecast industry sales and supplier distress or disruption as material risks, and warned that more severe scenarios could pressure liquidity.
- Unusual items: Q2 included $3.381 billion of gains on debt extinguishment, including gains from debt repurchases and exchanges; first-half such gains were $4.660 billion. First-half charges included a $650 million Volvo held-for-sale impairment, a $281 million foreign-currency translation loss on liquidation of a subsidiary, and a $141 million Financial Services investment impairment. A Canadian transfer-pricing agreement benefited Q2 tax expense by about $190 million; first-half tax benefits also included about $273 million of prior-period refunds and related interest.
- Ford had a conditional U.S. Department of Energy commitment for a $5.9 billion advanced-technology vehicle loan facility, subject to definitive agreements. A July 2009 amendment to the UAW retiree-health settlement, including an option to pay part of future obligations in stock, remained subject to court approval and other conditions.
- Key risks include continued weak vehicle demand, supplier insolvency or higher supplier costs, credit-market and securitization constraints, rising credit losses, currency and commodity movements, lease residual values, pension and retiree-health obligations, and regulatory or product-quality costs.
Most important facts for investors to verify
- How much of reported profit reflects debt-extinguishment gains rather than recurring vehicle and financing operations.
- Automotive cash use, the composition and availability of gross cash, and the ability to meet secured debt and other obligations.
- Ford Credit’s credit-loss trends, allowance adequacy, funding access, and reliance on securitization and government-supported programs.
- Execution of the 2009 cost-reduction plan, the 2011 breakeven objective, and assumptions for industry sales and market share.
- Completion and terms of the Volvo sale process, the DOE loan facility, and the amended UAW VEBA settlement.