FORD MOTOR CO quarterly report, Q2 FY2019

Ford Motor Company — Q2 2019 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2019. Unless noted, amounts are U.S. dollars. The financial statements are unaudited.

Business context and results

Ford operates Automotive, Mobility, and Ford Credit segments. Q2 revenue was essentially flat year over year despite 9% lower wholesales; stronger mix and pricing offset lower volumes and adverse currency effects. Management cited North American launch-related volume impacts and weakness in China among the drivers of lower wholesales.

Key financial metrics

Metric	Q2 2019	Q2 2018	First half 2019	First half 2018
Total revenue	$38.853 billion	$38.920 billion	$79.195 billion	$80.879 billion
Net income attributable to Ford	$148 million	$1.066 billion	$1.294 billion	$2.802 billion
Diluted GAAP EPS	$0.04	$0.27	$0.32	$0.70
Net income margin	0.4%	2.7%	Not clearly stated	Not clearly stated

Q2 adjusted EBIT was $1.7 billion, with a 4.3% adjusted EBIT margin, flat year over year. Adjusted diluted EPS was $0.28. Ford reported that GAAP net income fell largely because of $1.2 billion in special-item charges, mostly related to global redesign actions.
First-half net cash from operating activities was $10.007 billion, compared with $8.486 billion a year earlier. Investing activities used $3.824 billion; financing activities used $808 million. These consolidated cash-flow figures include Ford Credit and are not equivalent to adjusted free cash flow.
At June 30, cash and cash equivalents were $22.117 billion and marketable securities were $15.931 billion. Company cash excluding Ford Credit was $23.2 billion; Company liquidity, including available credit lines, was $37.3 billion.
Automotive debt was $13.994 billion; Ford Credit debt was $141.470 billion; other debt was $600 million. Ford reported $14.6 billion of Company debt excluding Ford Credit. Ford Credit’s managed leverage was 8.6:1, within its stated 8:1–9:1 target range.
Ford Credit earned $831 million before tax in Q2, up from $645 million a year earlier. Managed receivables were $152 billion, approximately flat year over year; net liquidity available for use was $33.6 billion.

Material changes and management commentary

Q2 revenue declined only slightly, while first-half revenue fell about 2.1%. First-half Ford-attributable net income declined by more than half year over year.
Automotive EBIT grew 19% year over year in Q2, with segment margin expanding 60 basis points. North American EBIT was pressured by Explorer and Interceptor changeovers, the Aviator launch, lower volume, and higher warranty costs; Ford cited strong truck and utility mix and pricing as offsets. Europe recorded a $53 million EBIT profit, its first year-over-year quarterly improvement in two years. China’s EBIT loss narrowed to $155 million.
Ford Credit’s Q2 pre-tax earnings rose 29%; management cited healthy consumer credit conditions and off-lease auction values slightly better than expectations year to date. It expected 2019 auction values to decline about 3% on average year over year at constant mix.
Ford recorded $181 million of Q2 mark-to-market losses on its Pivotal Software investment within Corporate Other. Other income, net, fell to $272 million from $1.004 billion in Q2 2018.
Ford invested $500 million in Rivian during Q2. It expected 2019 capital spending of about $7.7 billion and annual spending of about $7 billion through 2022.

Outlook, risks, and unusual items

The filing’s 2019 company-guidance table is not legible or reproduced in the supplied filing text; specific full-year guidance values therefore cannot be stated clearly. Management said its guidance reflected the then-current economic environment, including commodities, foreign exchange, and tariffs.
Ford estimated about $11 billion of total potential EBIT charges and about $7 billion of negative cash effects from global redesign actions. For 2019, it expected $3–$3.5 billion of charges and $1.5–$2 billion of negative cash effects, with $0.5–$1 billion of cash effects shifted to 2020. Substantially all charges were expected to be treated as special items.
Redesign actions included exiting South American commercial heavy trucks, restructuring Ford’s Russia business, and plans to exit the Bridgend, Wales plant in 2020. Ford estimated total 2019 charges from these actions at $3–$3.5 billion.
Ford targeted at least $20 billion of Company cash and at least $30 billion of Company liquidity. It expected full-year shareholder distributions of $2.6 billion and pension contributions and payments totaling about $1 billion.
Risks include product defects, recalls and warranty costs; economic, geopolitical, trade, currency, commodity, and interest-rate volatility; pension funding; and Ford Credit credit losses, residual values, and access to funding. Warranty and field-service-action obligations were $5.107 billion at June 30.
Ford estimated reasonably possible losses above accrued amounts for indirect tax and customs matters of up to about $700 million. A separate emissions-certification matter was under U.S. Department of Justice criminal investigation; Ford said it could not predict the outcome or rule out a material adverse effect. In a Transit Connect customs dispute, a federal appeals panel ruled for Customs; Ford petitioned for rehearing, and potential duties, interest, and penalties remained at issue.

Most important facts for investors to verify

Obtain the complete 2019 guidance table and confirm the company’s full-year earnings, cash-flow, and segment outlook.
Track the timing, cash costs, and savings from the global redesign, including the shift of expected cash effects into 2020.
Monitor the emissions-certification investigation, Transit Connect customs case, and other litigation and warranty exposures.
Assess whether Ford Credit’s credit performance, used-vehicle residual values, funding access, and leverage remain consistent with management’s expectations.
Review liquidity and debt needs alongside the planned capital spending, pension funding, and shareholder distributions.