Ford Motor Company — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Figures are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Ford’s results were materially affected by COVID-19, including manufacturing suspensions beginning in late March and a phased restart from May.
Financial results and liquidity
| Metric | Q2 2020 | First half 2020 | Comparable 2019 |
|---|---|---|---|
| Revenue | $19.4 billion | $53.7 billion | Q2 $38.9 billion; first half $79.2 billion |
| Net income/(loss) attributable to Ford | $1.12 billion | $(876) million | Q2 $148 million; first half $1.29 billion |
| Adjusted EBIT (non-GAAP) | $(1.95) billion | $(2.58) billion | Q2 $1.65 billion; first half $4.10 billion |
| Adjusted EBIT margin | (10.0)% | (4.8)% | Q2 4.3%; first half 5.2% |
| Operating cash flow | $9.1 billion | $8.6 billion | Q2 $6.5 billion; first half $10.0 billion |
| Adjusted free cash flow (non-GAAP) | $(5.3) billion | $(7.6) billion | Q2 $0.2 billion; first half $2.1 billion |
Q2 reported net income was driven by a $3.5 billion pre-tax gain from the Argo AI/VW transaction; it does not represent underlying operating profitability. Q2 diluted EPS was $0.28, while adjusted diluted EPS was a loss of $0.35. First-half diluted EPS was a loss of $0.22.
- Automotive: Q2 revenue was $16.6 billion, down 54% year over year; segment EBIT was a loss of $2.1 billion, versus $1.4 billion income a year earlier. Wholesales fell to 645,000 from 1.364 million. The volume decline was partly offset by improved pricing and costs.
- Ford Credit: Q2 pre-tax earnings were $543 million, down $288 million year over year. Net receivables were $130 billion, down 9%; the first-half credit-loss provision was $679 million, including $532 million primarily related to COVID-19.
- Cash and liquidity: At June 30, company cash excluding Ford Credit was $39.3 billion and company liquidity was $39.8 billion. Ford reported $31.0 billion of consolidated cash and cash equivalents and $26.1 billion of marketable securities. Company cash included substantial revolver borrowings and new debt proceeds.
- Debt and balance sheet: Company debt excluding Ford Credit was $40.0 billion, versus $15.3 billion at year-end 2019; Automotive debt was $39.5 billion. Ford Credit debt was $135.3 billion. Total assets were $269.4 billion and total equity was $30.9 billion. Ford repaid $7.7 billion of revolver borrowings on July 27, after quarter-end.
- Other measures: Inventory was $10.2 billion, down from $10.8 billion at year-end. Warranty and field-service obligations were $6.1 billion, up from $5.7 billion. Total global pension underfunding was $5.8 billion.
Material changes versus prior year
Q2 revenue halved and adjusted EBIT deteriorated by $3.6 billion, principally because production suspensions and sharply lower industry volumes reduced Automotive volume. North America operated at 96% of pre-pandemic production levels by quarter-end; Ford said it returned to pre-COVID production levels in North America, Europe, and China by July. Cash from operations rose year over year, but Ford attributed the improvement primarily to Ford Credit cash flow, including a $9.8 billion decrease in finance receivables; company adjusted free cash flow weakened substantially. The first-half net loss also reflects a $1.1 billion valuation allowance on certain deferred tax assets and increased credit-loss reserves.
Outlook, risks, and unusual items
- As of July 30, 2020, Ford expected Q3 adjusted EBIT of $0.5–$1.5 billion, a Q4 adjusted EBIT loss, and a full-year adjusted EBIT loss. Guidance assumes no material deterioration in the economic environment and no significant further COVID-related production or distribution disruption.
- Ford forecast 2020 capital spending of $6.1–$6.6 billion, global redesign EBIT charges and cash effects each of $0.7–$1.2 billion, and funded pension contributions of $0.5–$0.7 billion. It expected full-year warranty costs to exceed 2019.
- Ford Credit expected full-year auction values to decline about 5% versus 2019 at constant mix, and public funding issuances of $18–$24 billion. It reported $32.4 billion of net liquidity available for use and targeted managed leverage of 8:1–9:1; actual managed leverage was 8.5:1.
- COVID-19 could again disrupt production, suppliers, dealers, demand, and cash flow. Ford Credit also warned of potential higher defaults, weaker used-vehicle values, and funding-market disruption. The company stated that the pandemic’s ultimate financial impact could not be determined.
- Fitch and DBRS downgraded Ford and Ford Credit in May; Moody’s confirmed Ba2 ratings with negative outlook, and S&P ratings were on CreditWatch with negative implications. These non-investment-grade ratings may affect funding access and cost.
- Ford recognized the Argo AI/VW transaction gain after deconsolidating Argo AI; it retained investments valued at $2.8 billion and committed up to $600 million of future funding, subject to capital calls. Ford also completed the Forso sale for $1.3 billion cash proceeds.
- Litigation and contingencies include estimated reasonably possible losses of up to about $400 million for indirect tax and customs matters, plus an emissions certification matter for which Ford could not estimate potential loss. Following denial of its U.S. Supreme Court petition, Ford said it would owe additional Transit Connect import duties and interest; CBP might also seek penalties.
Investor verification priorities
- Separate the $3.5 billion Argo AI-related gain and associated tax effects from recurring operating performance; compare GAAP results with adjusted measures.
- Track post-quarter revolver repayment, remaining Automotive debt, liquidity availability, and the cost and terms of funding.
- Monitor the pace and sustainability of production recovery, vehicle demand, wholesales, pricing, and the Q4 F-150 launch impact against guidance assumptions.
- Assess Ford Credit reserve adequacy, payment-extension outcomes, delinquencies, defaults, auction values, and lease residual performance as relief programs expire.
- Review progress on restructuring charges and cash costs, warranty trends, the India transaction, and developments in disclosed tax, customs, and emissions matters.