Ford Motor Company — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited interim results. The independent accountant performed a review, not an audit. Amounts are in U.S. dollars; financial statement amounts are generally in millions.
Business context and results
Ford reports Automotive and Financial Services (principally Ford Credit). Total-company revenue increased 10% year over year, while reported pretax income rose modestly. Management’s operating comparisons generally exclude special items.
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Total revenue | $35.81B | $32.45B | Up 10%; Automotive revenue $33.86B, Financial Services $1.95B |
| Pretax income, reported | $2.12B | $2.04B | Up $85M |
| Pretax results, excluding special items | $2.15B | $2.29B | Down $147M |
| Net income attributable to Ford | $1.61B | $1.40B | Up $215M; includes a $221M tax benefit from retroactive U.S. tax-law changes |
| Diluted EPS | $0.40 | $0.35 | Cash dividends declared were $0.10/share, versus $0.05 |
| Automotive pretax income, reported | $1.62B | $1.58B | Q1 2013 included $23M of special-item charges; Q1 2012 included $255M of charges |
| Financial Services pretax income | $503M | $456M | Ford Credit improvement was attributed mainly to higher receivables and favorable residual performance |
| Automotive operating margin | 5.2% | 5.3% | Excludes special items and Other Automotive, per the filing’s definition |
Cash flow, balance sheet, debt and liquidity
- Consolidated operating cash flow was $211M, versus $2.08B in Q1 2012. Sector operating cash flow totaled $2.27B; the consolidated presentation reclassified $1.84B of wholesale receivable cash flows from investing to operating activities in 2013. Automotive GAAP operating cash flow was $721M, versus $875M.
- Ford’s non-GAAP Automotive operating-related cash flow was $0.7B, versus $0.9B. Automotive gross cash was $24.2B, down from $24.3B at year-end; Automotive net cash was $8.2B, versus $10.0B. Automotive liquidity, including available credit lines, was $34.5B.
- At March 31, total cash and cash equivalents were $13.82B and marketable securities were $20.52B. Total debt was $107.36B, including $16.01B Automotive debt and $91.35B Financial Services debt. The sectors have materially different funding models; Ford Credit’s debt largely funds receivables and leases.
- Total assets were $193.01B and total equity was $17.64B. Ford Credit managed receivables were $93.9B; its available liquidity was $20.2B and managed leverage was 8.4:1.
- Ford Credit’s allowance for credit losses was $389M, down $90M year over year. Management described credit losses as near historically low levels; lease returns and residual values remain important sensitivities.
Material changes and unusual items
- Automotive revenue and wholesales were each about 10% above the prior year, driven mainly by North America and Asia Pacific Africa. Automotive pretax results excluding special items declined, primarily due to higher costs and unfavorable foreign exchange; favorable volume and pricing partly offset this.
- Ford North America delivered higher pretax profit, but margin was pressured by investment in new products and growth and higher pension and postretirement costs. Europe and South America reported pretax losses; Asia Pacific Africa reported a small profit.
- Venezuela’s February currency devaluation generated a $186M remeasurement loss. Ford reported $422M in net monetary assets denominated in bolivars and cited restrictions on converting currency, paying U.S.-dollar obligations, obtaining parts and maintaining normal production.
- Ford consolidated Ford Romania effective January 1, 2013, recording a $15M pretax loss on remeasurement of its prior equity interest. The consolidation added Romanian debt, including approximately $512M of EIB debt. Ford also classified $571M of Volvo-related retail financing receivables as held for sale.
- Ford contributed $1.8B to funded pension plans in Q1, including $1.2B of discretionary U.S. contributions. It expected about $5B of funded-plan contributions and about $400M of unfunded-plan benefit payments for 2013.
- Special items were a net $23M charge in Q1 2013, compared with $255M in Q1 2012. Q1 2013 included separation-related charges and the Ford Romania consolidation loss.
Guidance, risks and contingencies
- Ford maintained its 2013 outlook: total-company pretax profit about equal to 2012; Automotive operating margin about equal to or below 2012; Automotive operating-related cash flow higher than 2012; and planned capital spending of about $7B.
- Segment outlook: North America pretax profit higher than 2012 with about a 10% margin; South America about breakeven; Europe a loss of about $2B; Asia Pacific Africa about breakeven. Ford Credit expected pretax profit about equal to 2012, managed receivables of $95B–$105B and distributions of about $200M.
- Management anticipated global economic growth of 2%–3%, but described Europe as weak and conditions in Venezuela and Argentina as particularly uncertain. Europe’s restructuring plan included planned U.K. plant closures and ongoing action at Genk, Belgium; a significant portion of Genk separation costs was expected as a special item in Q2.
- Ford estimated reasonably possible loss in excess of accruals for material matters, principally indirect tax and customs matters, at up to about $2.7B in aggregate. The company cautioned that litigation outcomes are uncertain. A U.S. customs ruling on certain Transit Connect vehicles could lead to higher duties, recovery of prior duties and possible penalties; the filing does not give a clear quantified exposure. A Brazilian state tax appeal had been denied in one state, and collateral could be required in court proceedings.
- Key disclosed risks include weaker vehicle demand or market share, product defects and recalls, foreign exchange and commodity movements, supplier disruption, pension liabilities, regulatory changes, litigation, and Ford Credit credit-loss, residual-value, funding and liquidity risks.
- After quarter-end, Ford amended its revolving credit agreement, extending maturity to November 2017 and increasing commitments to $10.7B. Management said the facility has a $4B minimum-liquidity covenant. Ford reported disclosure controls were effective; it also noted new financial consolidation and treasury systems and the Romania consolidation as control-related developments.
Investor verification priorities
- Reconcile the $221M retroactive tax benefit with reported earnings and assess the sustainability of underlying pretax results, which declined excluding special items.
- Track Automotive cash generation, pension funding, debt issuance and the planned $7B of capital spending; distinguish Ford Credit debt and receivables from Automotive liquidity.
- Monitor Europe restructuring costs and the South American foreign-exchange and operating constraints, particularly in Venezuela and Argentina.
- Review the $2.7B potential excess-loss estimate and subsequent developments in the Transit Connect customs dispute and Brazilian tax litigation.
- Assess Ford Credit’s credit losses, lease-return volumes, used-vehicle values, securitization funding and managed leverage against management’s 2013 outlook.