Ford Motor Company — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparative figures are for Q1 2009. Unaudited interim results; the independent accountant performed a review, not an audit. Amounts are U.S. dollars.
Financial results and condition
- Revenue: $31.566 billion, up 29% from $24.390 billion. Automotive sales were $28.894 billion, up 38%; Financial Services revenue was $2.672 billion, down 22%.
- Profit: Net income attributable to Ford was $2.085 billion, versus a $1.427 billion attributable loss. Pretax income was $2.135 billion, compared with a $1.662 billion loss; income tax provision was $50 million.
- Per-share results: Basic EPS was $0.62 and diluted EPS was $0.50, versus a $0.60 loss per share for both measures in Q1 2009. Diluted EPS reflected assumed dilution from convertible and other securities.
- Operating performance: Automotive operating income was $1.535 billion, versus a $2.442 billion loss; calculated operating margin was 5.3%, versus negative 11.6%. Consolidated net margin, calculated from attributable net income and total revenue, was 6.6%, versus negative 5.9%.
- Segments: Automotive pretax income was $1.320 billion, versus a $1.510 billion loss. Financial Services pretax income was $815 million, versus a $152 million loss. Ford Credit pretax income was $828 million, versus a $36 million loss.
- Cash flow: Consolidated operating cash flow was $2.683 billion, down from $4.016 billion. Capital expenditures were $1.068 billion. Management’s Automotive operating-related cash flow measure was negative $100 million, compared with negative $3.5 billion; this is a non-GAAP measure and differs from GAAP operating cash flow.
- Liquidity and debt: Automotive gross cash was $25.3 billion, versus $24.9 billion at year-end 2009; Automotive net debt was $9.0 billion, versus $8.7 billion. Consolidated cash and cash equivalents were $24.356 billion and marketable securities $21.883 billion. Total debt was $130.105 billion, including $96.286 billion in Financial Services debt. Ford reported a $5.437 billion total equity deficit.
- Margins and credit quality: Ford Credit’s charge-offs were $133 million, versus $332 million, and its loss-to-receivables ratio declined to 0.58% from 1.21%. Its allowance for credit losses was $1.356 billion, or 1.49% of period-end receivables.
Material changes versus Q1 2009
- Automotive results improved with higher volume and mix, better pricing, and the absence of the prior-year $650 million Volvo held-for-sale impairment. These benefits were partly offset by the absence of a prior-year $1.3 billion debt-reduction gain.
- Ford Credit improved mainly due to lower vehicle residual losses and depreciation expense, lower credit-loss provisions, higher financing margins, and lower operating costs. Lower average receivables partly offset the improvement.
- Automotive wholesale volumes rose 36% to 1.345 million units. U.S. market share increased to 16.5% from 13.9%.
- Ford Credit managed receivables declined to $89.9 billion from $94.5 billion at year-end. Its financial-statement debt-to-equity leverage was 8.7:1 and managed leverage 6.9:1, down from 8.8:1 and 7.3:1, respectively.
- The company adopted a revised variable-interest-entity consolidation standard in 2010, deconsolidating most Automotive joint ventures and accounting for them as equity-method investments. Comparative 2009 figures were retrospectively adjusted; this affected reported revenues and segment results.
Outlook, commentary, and risks
- Management expected 2010 to deliver solid profits and positive Automotive operating-related cash flow, with continued improvement in 2011. The full-year plan for positive Automotive operating-related cash flow was described as on track; Q1’s $100 million outflow was attributed mainly to seasonal inventory and receivables timing.
- Ford projected global industry sales volume growth of 5%–10% for 2010. Its European industry-volume outlook was raised to 14–15 million units. Q2 2010 production was planned at 1.421 million units, with North American production guidance raised by 30,000 units from March.
- Management expected Automotive structural costs to be somewhat higher as production and investment increased, and net product costs to rise, particularly with commodity costs. Pricing improvement was expected to be smaller than in 2009.
- Ford Credit expected full-year pretax profit about in line with 2009, managed receivables of $80–$90 billion at year-end, and approximately $2 billion in 2010 distributions to Ford, subject to liquidity and leverage objectives.
- Ford agreed to sell Volvo and related assets to Zhejiang Geely for $1.8 billion, subject to purchase-price adjustments, with closing expected in Q3 2010. Adjustments for pension liabilities, debt, cash, and working capital could materially reduce cash proceeds. Ford planned to use part of the proceeds to prepay secured term loans.
- Significant risks include economic and vehicle-demand weakness, market-share and pricing pressure, commodity and currency volatility, supplier or labor disruption, pension obligations, warranty or recall costs, and restricted access to debt, securitization, or derivatives markets. Ford Credit remained below investment grade and relied substantially on securitization funding; committed facilities and funding renewals carry eligibility and market risks.
- Ford continued to maintain a full valuation allowance against U.S. deferred tax assets and certain foreign assets. Management said sustained North American profitability would be needed before reconsidering the U.S. allowance. Potential changes in tax-asset realization could materially affect results.
- Other notable items: Ford made a $500 million pension contribution in Q1 and expected a further $1 billion in 2010. A $3 billion revolving-credit repayment made April 6 remained available to borrow. A prior SEC inquiry into pension and post-employment accounting was concluded in March 2010; a separate environmental settlement included an $80,640 penalty.
Important facts for investors to verify
- Reconcile reported basic EPS of $0.62 and diluted EPS of $0.50, including the effect of assumed dilution and convertible securities.
- Assess the sustainability and cash conversion of Q1 earnings, including management’s non-GAAP Automotive operating-related cash flow measure and seasonal working-capital effects.
- Track Volvo sale closing, purchase-price adjustments, proceeds, and the associated required debt prepayment.
- Monitor Ford Credit’s credit losses, used-vehicle residual values, receivables, securitization access, facility renewals, and liquidity.
- Review Automotive debt maturities, collateral and liquidity-covenant requirements, pension funding, and the full valuation allowance on deferred tax assets.
- Account for the retrospective VIE-consolidation change when comparing periods; the filing states Q1 results are not necessarily indicative of full-year results.