Ford Motor Company — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Figures are unaudited; dollar amounts are U.S. dollars. Ford reports Automotive and Financial Services sectors, including Ford Credit.
Financial performance
| Metric | Q3 2015 | Q3 2014 | First nine months 2015 | First nine months 2014 |
|---|---|---|---|---|
| Total revenue | $38.1bn | $34.9bn | $109.3bn | $108.2bn |
| Pre-tax income, including special items | $2.859bn | $1.021bn | $7.132bn | $4.398bn |
| Net income attributable to Ford | $1.909bn | $835m | $4.718bn | $3.135bn |
| Diluted earnings per share | $0.48 | $0.21 | $1.18 | $0.78 |
- Sector results: Automotive pre-tax income was $2.333bn in Q3 and $5.646bn year to date. Excluding special items and Other Automotive, Automotive pre-tax results were $2.167bn and $5.480bn, respectively. Financial Services pre-tax income was $526m in Q3 and $1.486bn year to date.
- Margins: Automotive operating margin was 5.9% year to date, versus 3.9% for full-year 2014. North America exceeded 11% for a second consecutive quarter and averaged 9.9% year to date. The filing text does not provide a clear consolidated-company operating margin.
- Cash flow: Nine-month consolidated operating cash flow was $14.078bn, versus $12.339bn in 2014. Automotive operating-related cash flow, a company-defined non-GAAP measure, was $5.2bn, versus $3.1bn. Automotive gross cash was $22.2bn; automotive liquidity, including available credit lines, was $33.2bn.
- Debt and liquidity: Consolidated debt was $126.4bn, up from $119.2bn at year-end 2014, largely reflecting Financial Services funding. Automotive debt was $12.8bn and Automotive net cash was $9.4bn. Ford Credit reported $25.3bn of net liquidity available and managed leverage of 9.1:1, up from 8.7:1 at year-end.
- Other balance-sheet metrics: Cash and cash equivalents were $14.7bn; marketable securities were $17.2bn. Total assets were $219.4bn and equity attributable to Ford was $27.5bn. Ford declared dividends of $0.15 per share for Q3.
Material changes and notable items
- Q3 revenue increased 9% year over year and Ford-attributable net income more than doubled. Management described the quarter as a record for company pre-tax profit and Automotive operating-related cash flow, with North America’s best quarter ever.
- Automotive pre-tax results excluding special items improved $1.481bn in Q3 year over year. North America drove the gain; market factors outweighed higher costs. Europe’s loss narrowed, while South America remained challenged and Asia Pacific results were affected by lower volume and dealer-stock reductions.
- Q3 and nine-month pre-tax results included a $166m special gain related to the Nemak IPO. Automotive other income also included $189m of Q3 realized and unrealized gains on cash equivalents and marketable securities. Compare reported results with results excluding these items.
- Ford consolidated Ford Sollers beginning March 31, 2015, after restructuring the joint venture and providing additional funding. Ford recorded a $93m redeemable noncontrolling interest at acquisition. In the second quarter, Ford sold its BDT interest, recognizing a $19m gain.
- Foreign currency translation reduced other comprehensive income by $1.344bn in the first nine months. In Q1, Ford recorded a $782m adjustment correcting an understatement in its year-end 2014 U.S. pension obligation; the company said the adjustment was not material to current or prior-period financial statements.
Outlook, risks and contingencies
- Management said it remained on track for 2015 guidance: total-company pre-tax profit of $8.5bn–$9.5bn excluding special items; higher Automotive revenue, operating margin and operating-related cash flow than 2014; and Ford Credit pre-tax profit equal to or above 2014. The expected full-year operating effective tax rate was about 30%, assuming extension of U.S. research credit legislation.
- North America was expected to deliver full-year pre-tax profit above 2014, with operating margin at the upper end of the 8.5%–9.5% range. Ford continued to expect improved full-year pre-tax losses in South America and Europe, about breakeven in Middle East & Africa, and higher Asia Pacific pre-tax profit than in 2014.
- Ford Credit projected year-end managed receivables of $124bn–$127bn, full-year public term funding of $28bn–$31bn, and distributions of about $250m. Its managed leverage was expected to remain temporarily above its 8:1–9:1 target range, partly due to the strong U.S. dollar.
- Key risks cited include weaker vehicle demand or market share, product acceptance and mix shifts, currency and commodity volatility, supplier disruptions, labor constraints, pension exposure, warranty and recall costs, regulation, litigation, cybersecurity, and Ford Credit credit losses, residual values and funding access.
- Ford estimated reasonably possible loss above accruals for material legal matters, primarily indirect tax and customs matters, at up to about $2.3bn in aggregate. The EPA issued a notice of violation concerning alleged air-permit violations at Ford’s Chicago Assembly Plant; potential monetary sanctions had not been determined. Ford stated that outcomes of legal matters are uncertain.
- Ford Credit’s receivables and securitization funding involve assets restricted to the obligations of securitization entities. Ford also disclosed guarantees and indemnities, including some with no stated maximum payment, and continuing warranty and field-service obligations.
Important facts for investors to verify
- Reconcile reported earnings to results excluding the $166m Nemak special gain and assess the sustainability of investment-related gains and sector earnings.
- Review Automotive liquidity, debt-reduction plans, capital spending expectations and pension funding needs; Ford expected about $7.5bn of 2015 capital spending and targeted about $10bn of Automotive debt by 2018.
- Monitor Ford Credit’s rising receivables, credit-loss provisions, lease residual performance, liquidity and leverage against its target range.
- Assess exposure to currency movements, especially the strong U.S. dollar, and to regional demand weakness, supplier constraints and changing vehicle mix.
- Track the outcome and potential financial impact of the indirect tax/customs matters, Chicago plant EPA notice, warranty and recall claims, and other litigation.
- Note that PwC performed a review—not an audit—of the interim financial statements; the filing says the review identified no material modifications needed for GAAP conformity.