Ford Motor Company — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This annual filing includes fourth-quarter results but is not a standalone Q4 filing. Ford designs, manufactures, and sells Ford and Lincoln vehicles, operates mobility and autonomous-vehicle development businesses, and provides vehicle financing and leasing through Ford Credit.
Financial performance and position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $160.3 billion | $156.8 billion | Up 2% |
| Net income attributable to Ford | $3.7 billion | $7.7 billion | Down $4.1 billion |
| Diluted EPS | $0.92 | $1.93 | Down $1.01 |
| Adjusted EBIT (non-GAAP) | $7.0 billion | $9.6 billion | Down $2.6 billion |
| Net income margin | 2.3% | 4.9% | Down 2.6 percentage points |
| Adjusted EBIT margin (non-GAAP) | 4.4% | 6.1% | Down 1.7 percentage points |
| Cash provided by operating activities, consolidated | $15.0 billion | $18.1 billion | Down $3.1 billion |
Ford reported $4.3 billion of income before taxes and a $650 million tax provision, for a 15.0% effective tax rate; its adjusted effective tax rate was 9.7%. The reported Q4 2018 net loss attributable to Ford was $116 million, versus Q4 2017 net income of $2.5 billion. Q4 2018 revenue was $41.8 billion, and pretax income was a loss of $17 million.
Ford Credit generated $2.6 billion of earnings before taxes, up $317 million and its best result in eight years. Mobility reported a $674 million pretax loss. Automotive results were hurt by lower China and Europe performance, costs, and other headwinds; the filing’s supplied text does not give a clear standalone Automotive EBIT amount.
Liquidity, debt, and capital allocation
- Year-end Company cash, excluding Ford Credit, was $23.1 billion; Company liquidity was $34.2 billion. Ford’s stated targets were at least $20 billion of Company cash and at least $30 billion of total Company liquidity.
- Consolidated cash, cash equivalents, marketable securities, and restricted cash totaled $34.1 billion, including Ford Credit balances.
- Company debt excluding Ford Credit was $14.1 billion, including $13.5 billion of Automotive debt, down about $2.4 billion year over year. Ford Credit debt was $140.1 billion and is used to fund its financing business.
- Company adjusted debt to EBITDA was 3.2:1; Ford Credit managed leverage was 8.8:1, within its 8:1–9:1 target range. These are non-GAAP measures.
- Capital spending was $7.8 billion. Ford paid about $3.1 billion in shareholder distributions; declared dividends were $0.73 per share for 2018.
Material changes and notable items
- Global wholesale volume declined to 5.982 million vehicles from 6.607 million. China wholesales fell to 731,000 from 1.215 million; reported China market share declined to 2.9% from 4.2%.
- Management cited about $3.3 billion in 2018 headwinds: $750 million of tariff effects, $1.1 billion of higher commodity costs excluding tariffs, $750 million of unfavorable exchange net of pricing, and $775 million of Takata recall costs. Lower China joint-venture income was a major factor in the Asia Pacific decline.
- Fourth-quarter results included an $877 million pension and OPEB remeasurement loss. Full-year special items also included pension/OPEB remeasurement and personnel-related actions; the segment reconciliation reports $1.429 billion of pretax special-item losses.
- Ford changed U.S. inventory accounting from LIFO to FIFO, retrospectively applied; the company said the 2018 impact was immaterial. It also reorganized its reportable segments into Automotive, Mobility, and Ford Credit, with prior periods adjusted.
- Ford impaired $40 million of Chariot goodwill after deciding to cease operations. It acquired Autonomic, TransLoc, and Spin during 2018.
Outlook, risks, and contingencies
- For 2019, Ford indicated potential year-over-year improvement: revenue above $160.3 billion, adjusted EBIT margin above 4.4%, adjusted ROIC above 7.1%, adjusted cash conversion above 40%, and adjusted debt to EBITDA below 3.2:1. Management expected stronger adjusted operating cash flow and improved Automotive EBIT, with North America, China, and Europe contributing to potential improvement. It expected higher Mobility investment and lower, though still strong, Ford Credit EBT.
- Management assumed 2019 global industry volume would be about flat, with modest declines in the United States and China; it did not expect a U.S. recession. Ford projected 2019 capital spending of about $7.7 billion and pension contributions and unfunded-plan benefit payments totaling about $1 billion.
- Ford identified risks from volatile auto demand, industry overcapacity and pricing pressure, reliance on larger profitable vehicles, tariffs and commodity costs, currency and interest-rate movements, labor and supplier disruption, product quality and recalls, changing emissions and fuel-economy rules, pension obligations, cybersecurity, and Ford Credit credit losses, residual values, and funding access.
- A hard Brexit could cost Ford an estimated $500 million to $1 billion in 2019, excluding currency effects. Ford also disclosed a preliminary concern with its U.S. emissions certification process, voluntarily reported to the EPA in February 2019; it said the matter did not involve defeat devices and that the outcome and potential impact were not yet predictable.
- Ford’s $299 million Takata consumer economic-loss settlement received court approval in December 2018; appeals were filed. Ford Credit’s FCE Bank faced an approximately $50 million Italian competition-law fine and planned to appeal. Brazilian tax and customs matters remain pending; Ford estimated reasonably possible losses above accruals for material matters of up to about $600 million for indirect tax and customs, plus an emissions matter whose exposure could not be estimated.
- As a subsequent event, Ford Brazil committed in February 2019 to exit its South American commercial heavy-truck business and cease production at São Bernardo do Campo during 2019. Ford expected about $460 million of pretax charges, mostly cash, with most charges expected in 2019.
Most important facts for investors to verify
- Reconcile the decline in net income and adjusted EBIT, including pension remeasurement, restructuring, Takata costs, and lower China and Europe results.
- Track whether the 2019 improvement targets are achieved, especially Automotive EBIT, Company cash flow, and China performance; assess the comparability and assumptions behind the non-GAAP measures.
- Review the emissions certification inquiry, Takata settlement appeals, Italian fine appeal, Brazilian tax/customs disputes, and the costs and execution of the South America exit.
- Monitor Company cash and liquidity separately from Ford Credit funding, along with automotive debt, Ford Credit managed leverage, and pension funding requirements.
- Assess the effect of changing vehicle demand, regulatory requirements, tariffs, warranty/recall experience, and used-vehicle residual values on margins and Ford Credit earnings.