FORD MOTOR CO quarterly report, Q3 FY2019

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Ford Motor Company — Q3 2019 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2019. Comparisons are with the corresponding 2018 periods unless stated otherwise. Amounts are U.S. dollars.

Business context and results

Ford reports Automotive, Mobility and Ford Credit segments. Third-quarter results were affected by the company’s global redesign, including restructuring and the planned sale of certain India Automotive operations. Management reported stronger adjusted operating performance despite lower GAAP net income.

Key financial metrics

  • Q3 revenue: $37.0 billion, down 2%; Automotive revenue was $33.9 billion and Ford Credit revenue was $3.0 billion.
  • Q3 earnings: Operating loss of $261 million; net income attributable to Ford of $425 million, versus $991 million; diluted GAAP EPS of $0.11, versus $0.25. Adjusted EBIT was $1.8 billion and adjusted diluted EPS was $0.34.
  • Margins: GAAP net income margin was 1.1%, down 1.5 percentage points. Adjusted EBIT margin was 4.8%, up 0.4 percentage points.
  • First nine months: Revenue of $116.2 billion, down 2%; net income attributable to Ford of $1.719 billion, versus $3.793 billion; diluted EPS of $0.43, versus $0.95. Adjusted EBIT was $5.9 billion, versus $5.5 billion.
  • Cash flow: Operating cash flow was $4.7 billion in Q3 and $14.7 billion for nine months. Company adjusted free cash flow, a non-GAAP measure, was $207 million and $2.288 billion, respectively. Capital spending was $5.4 billion for nine months.
  • Cash and liquidity: At September 30, consolidated cash, cash equivalents, marketable securities and restricted cash totaled $37.5 billion. Excluding Ford Credit, company cash was $22.3 billion and company liquidity was $35.4 billion; cash net of company debt was $7.5 billion.
  • Debt: Automotive and other company debt, excluding Ford Credit, was $14.8 billion, up $690 million from year-end 2018. Ford Credit debt was $139.3 billion. Ford Credit net liquidity available for use was $35.4 billion; financial-statement leverage was 9.8:1 and managed leverage was 8.8:1.
  • Other balance-sheet items: Total assets were $258.2 billion and total equity was $35.4 billion at quarter-end. The company declared dividends of $0.15 per share in Q3.

Material changes versus prior comparable periods

  • Q3 net income fell by $566 million, principally reflecting $1.536 billion of special-item charges, including India impairment, pension remeasurement and a customs ruling charge. Adjusted EBIT rose $125 million, driven by improvement in North America, Europe and China and Ford Credit’s performance.
  • Q3 Automotive EBIT was $1.329 billion, down $73 million. Higher pricing was offset by lower volume/mix, higher costs and adverse exchange. Automotive wholesales fell 8% and market share declined 0.3 percentage points to 6.0%.
  • North America remained profitable, with Q3 EBIT of $2.012 billion. Europe and China narrowed their losses year over year; South America, Asia Pacific Operations and Middle East & Africa reported Q3 losses.
  • Ford Credit Q3 earnings before taxes increased to $736 million from $678 million. Receivables were lower year over year; reported credit-loss metrics were stable.
  • For the first nine months, net income attributable to Ford declined $2.074 billion, while adjusted EBIT increased $349 million. Global redesign special-item charges totaled $3.333 billion for the period.

Outlook, commentary and notable items

  • 2019 guidance, issued October 23, 2019: Adjusted EBIT of $6.5–$7.0 billion; adjusted EPS of $1.20–$1.32; adjusted free cash flow higher than 2018; global redesign EBIT charges of $3.0–$3.5 billion and cash effects of $1.0–$1.5 billion; capital spending of about $7.5 billion; shareholder distributions of $2.6 billion; and pension contributions of about $750 million. Ford expected Ford Credit auction values to decline about 2% on average at constant mix. Guidance assumes no material change in the economic environment and is subject to risks.
  • Management cited higher-than-planned warranty costs and North American incentives, as well as lower China volumes and joint-venture profits, as intensified headwinds. It continued to expect lower full-year Automotive structural costs, excluding pension and OPEB, and strength in Ford Credit.
  • Ford recorded a $799 million pre-tax impairment on India Automotive assets classified as held for sale. The proposed Mahindra joint venture would give Mahindra a 51% controlling stake and Ford a 49% interest; closing was expected within twelve months and remained subject to approvals and other conditions.
  • Global redesign actions included exiting South American heavy trucks and Russian passenger cars, reducing European operations and workforce, and restructuring India operations. Ford estimated 2019 redesign-related charges of $3.0–$3.5 billion.
  • Ford recognized a $442 million Q3 tax benefit, primarily related to non-U.S. restructuring items; the resulting reported Q3 effective tax rate was 2,326% on a pre-tax loss of $19 million. The adjusted effective tax rate was 10.7% for Q3 and 16.9% for the first nine months.
  • Moody’s downgraded Ford and Ford Credit to Ba1, below investment grade, on September 9, 2019, with a stable outlook. Other ratings shown in the filing remained investment grade, with negative outlooks.
  • Ford disclosed a U.S. Department of Justice criminal investigation relating to a potential emissions-certification concern involving road-load estimates and testing. The company said it could not predict the outcome or assure that it would not have a material adverse effect.
  • Ford’s appeal concerning customs duties on Transit Connect vehicles was denied at the Federal Circuit; Ford intended to petition the U.S. Supreme Court. If unsuccessful, additional duties, interest and possible penalties could be asserted. The Q3 included a $187 million charge related to the customs ruling.
  • The filing identifies product warranty and field-service exposures, including litigation relating to DPS6 transmissions. The warranty and field-service accrual was $5.220 billion at September 30, 2019. Ford also estimated reasonably possible losses of up to about $500 million for indirect tax and customs matters; it could not estimate potential loss for an emissions matter.
  • Ford expects to adopt the expected-credit-loss accounting standard on January 1, 2020, estimating an approximately $200 million increase to Ford Credit’s allowance at adoption.

Most important facts for investors to verify

  • Whether Ford delivers its updated 2019 adjusted EBIT, adjusted EPS and free-cash-flow guidance, and how much of reported earnings and cash flow is affected by special items.
  • Progress, final proceeds and closing conditions for the India transaction, and whether restructuring charges and cash costs remain within management’s estimates.
  • Developments in the emissions investigation, Transit Connect customs case and other material litigation or warranty claims.
  • Warranty-cost trends, particularly given management’s cited headwinds and the increase in the warranty accrual to $5.220 billion.
  • Effects of the Moody’s downgrade and any further rating changes on Ford’s and Ford Credit’s funding access, costs and liquidity.
  • Ford Credit receivables, credit losses, used-vehicle auction values, leverage and funding conditions, including the expected accounting-standard transition.