Ford Motor Company — Q2 2018 Form 10-Q
Business context and reporting period. Covers the quarter and six months ended June 30, 2018. Ford reports Automotive, Mobility, and Ford Credit segments; prior-period segment results were recast to the new structure. Unless stated otherwise, amounts are U.S. dollars.
Financial performance and position
- Revenue: Q2 revenue was $38.9 billion, down 2% year over year; first-half revenue was $80.9 billion, up from $79.0 billion. Q2 Automotive revenue fell to $35.9 billion from $37.1 billion, while Ford Credit revenue rose to $3.0 billion from $2.7 billion.
- Profit and earnings: Q2 net income attributable to Ford was $1.066 billion ($0.27 diluted EPS), versus $2.047 billion ($0.51) a year earlier. First-half attributable net income was $2.802 billion ($0.70 diluted EPS), versus $3.639 billion ($0.91). Q2 adjusted EBIT was $1.7 billion, down $1.1 billion year over year; adjusted EPS was $0.27, down $0.29.
- Margins: Q2 net income margin was 2.7% and adjusted EBIT margin was 4.3%, down 2.4 and 2.7 percentage points, respectively, year over year.
- Segment results: Q2 Automotive EBIT was $1.2 billion, including $1.8 billion in North America. South America, Europe, and Asia Pacific reported losses of $178 million, $73 million, and $394 million, respectively. Ford Credit EBT was $645 million, up $26 million; Mobility EBIT loss was $181 million.
- Cash flow and investment: First-half operating cash flow was $8.486 billion, compared with $9.951 billion in 2017. Investing cash outflow was $9.022 billion; financing cash outflow was $792 million. Capital spending was $3.7 billion in the first half.
- Liquidity: June 30 cash and cash equivalents were $16.8 billion and marketable securities were $19.6 billion. Ford reported total cash, securities, and restricted cash of $36.7 billion including Ford Credit. Company cash excluding Ford Credit was $25.2 billion; Company liquidity was $36.1 billion.
- Debt and equity: Automotive debt was $15.6 billion and total Company debt excluding Ford Credit was $16.2 billion. Ford Credit debt was $136.6 billion. Total equity attributable to Ford was $36.4 billion, up about $0.9 billion from year-end 2017.
- Other metrics: Ford Credit managed receivables were $151 billion. Its managed leverage was 8.3:1, within its 8:1–9:1 target. The allowance for credit losses was $587 million, compared with $597 million at year-end 2017.
Material changes versus the prior comparable period
- Q2 earnings declined primarily because of lower high-margin vehicle volumes in North America and weaker China performance. Company wholesale volumes fell 10% to 1.5 million units.
- A fire at supplier Meridian disrupted North American production; Ford attributed essentially all of the $579 million year-over-year decline in North America EBIT to this disruption.
- Asia Pacific EBIT fell $561 million year over year to a $394 million loss. Ford’s China operations lost $483 million, reflecting lower volume and pricing, including pricing and inventory effects associated with tariff changes.
- Europe shifted from a $122 million Q2 2017 profit to a $73 million loss, with higher regulatory-related costs and unfavorable exchange cited as factors.
- First-half cash and cash equivalents declined from $18.5 billion at year-end 2017 to $16.8 billion; inventories increased from $11.2 billion to $12.6 billion.
- Ford changed U.S. inventory accounting from LIFO to FIFO effective January 1, 2018 and retrospectively applied the change; the interim income statement, balance sheet, and cash-flow effects were described as immaterial. The change increased year-end 2016 retained earnings by $559 million.
Outlook, commentary, risks, and unusual items
- Guidance: Ford reduced 2018 adjusted EPS guidance from $1.45–$1.70 to $1.30–$1.50. Management attributed the reduction principally to weaker-than-expected Asia Pacific and Europe results, partly offset by stronger North America and Ford Credit performance; expected adjusted effective tax rate was about 13%.
- Ford expected 2018 adjusted operating cash flow to be below 2017 but positive; 2018 capital spending guidance remained $7.5 billion. It expected about $3 billion of full-year shareholder distributions and said it could sustain the regular dividend at its current level under its planning assumptions.
- Ford expected full-year average auction values to rise 1%–2% at constant mix. Ford Credit planned $26–$30 billion of 2018 public term funding; $19 billion had been issued through July 24.
- Ford identified trade tariffs, geopolitical and economic instability, foreign-exchange exposure, supplier or production disruptions, commodity prices, regulation, vehicle defects and recalls, cyber incidents, pension obligations, and Ford Credit funding, credit-loss, and residual-value risks.
- At June 30, Ford estimated reasonably possible losses in excess of accruals for material non-pattern matters of up to about $600 million, primarily related to indirect tax and customs matters. It also disclosed a July 16 agreement to settle consumer economic-loss claims involving Takata airbags for $299 million, subject to discounts and court approval; the settlement occurred after quarter-end.
- Other notable items: Argentina was classified as highly inflationary in June, and Ford was evaluating the accounting impact beginning July 1. Ford expected adoption of the lease standard in 2019 to add $1.5–$2 billion of right-of-use assets and lease obligations. A first-quarter tax benefit of $235 million related to non-U.S. capital loss carryforwards contributed to the first-half tax rate.
Important facts for investors to verify
- Whether the Meridian disruption and China pricing, volume, and tariff-related pressures persist, and how they affect full-year operating results.
- Performance against the revised adjusted EPS and cash-flow outlook, including the assumptions underlying non-GAAP measures.
- Automotive liquidity and debt separately from Ford Credit, and Ford Credit’s funding needs, managed leverage, credit losses, and lease residual values.
- Potential exposure from the Takata settlement, the disclosed tax/customs litigation range, warranties, recalls, and other contingencies.
- Effects of tariffs, foreign exchange and inflation—particularly in Argentina—and implementation of upcoming accounting standards.