Ford Motor Company — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unless otherwise noted, amounts are U.S. dollars. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Business context and key financial metrics
- Q3 revenue: $32.2 billion, down 2.6% from $33.0 billion a year earlier. Automotive revenue was $30.2 billion; Financial Services revenue was $1.9 billion.
- Q3 earnings: Pre-tax income was $2.25 billion, up from $1.85 billion. Net income attributable to Ford was $1.63 billion, versus $1.65 billion; diluted EPS was $0.41 in both periods. Higher income-tax expense largely offset the higher pre-tax result.
- Nine-month earnings: Revenue was $97.8 billion versus $101.7 billion; pre-tax income was $5.88 billion versus $7.23 billion; net income attributable to Ford was $4.07 billion versus $6.60 billion. Diluted EPS was $1.02 versus $1.62.
- Sector performance, Q3: Automotive pre-tax income was $1.86 billion, up from $1.24 billion; Financial Services pre-tax income was $388 million, down from $605 million. Ford said Automotive operating margin improved, but the extracted filing text does not provide a clear quarterly margin value.
- Cash flow: Consolidated operating cash flow for the first nine months was $9.41 billion, down from $10.02 billion. Automotive operating-related cash flow, a non-GAAP measure that includes capital spending, was $2.4 billion versus $4.9 billion; Automotive gross cash was $24.1 billion, up from $22.9 billion at year-end 2011.
- Liquidity and debt: At September 30, consolidated cash and cash equivalents were $13.5 billion and marketable securities were $22.0 billion. Automotive liquidity was $34.4 billion, including $24.1 billion gross cash; Automotive net cash was $9.9 billion. Consolidated debt was $100.6 billion, including $14.2 billion Automotive debt and $86.4 billion Financial Services debt.
- Balance sheet: Total assets were $184.7 billion and Ford-attributable equity was $18.8 billion. Inventories rose to $8.2 billion from $5.9 billion at year-end 2011.
Material changes versus comparable periods
- Q3 Automotive profit improved, primarily from higher net pricing and lower contribution costs. Ford cited a roughly $100 million favorable commodity-hedge adjustment, versus an approximately $350 million unfavorable adjustment in Q3 2011. Higher structural costs and unfavorable currency exchange partly offset the improvement.
- Ford’s nine-month net income declined substantially, reflecting weaker operating results and higher tax expense. Management linked the tax comparison in part to the prior-year release of a tax valuation allowance in Q4 2011.
- Ford Europe weakened materially: Q3 and nine-month revenue and pre-tax results fell year over year, amid lower industry sales, market share and dealer stocks. Ford Credit profit also declined, with fewer profitable lease terminations, lower financing margins and no repeat of prior credit-reserve reductions cited as drivers.
- Automotive gross cash increased from year-end, while consolidated cash and cash equivalents decreased by $3.6 billion. Ford made $2.5 billion of funded pension contributions in the first nine months.
Outlook, management commentary and risks
- Ford expected 2012 total-company pre-tax profit to remain strong but be lower than 2011, and expected positive Automotive operating-related cash flow, including capital spending.
- Ford North America outlook was unchanged: significantly higher full-year pre-tax profit and operating margin than 2011. South America was expected to remain profitable but at a substantially lower level; Asia Pacific Africa was expected to post a loss roughly in line with 2011.
- Ford raised its expected 2012 Ford Europe pre-tax loss to more than $1.5 billion, including over $400 million from dealer inventory reductions and about $100 million of accelerated depreciation. It expected 2013 results to be similar to 2012 and targeted a return to profitability by mid-decade. Plans included closing three facilities, reducing installed assembly capacity in Europe (excluding Russia) by 18%, and targeting annual gross savings of $450–$500 million. Management described European weakness as structural as well as cyclical.
- Ford Credit expected 2012 pre-tax profit of about $1.6 billion, full-year distributions of about $600 million, and year-end managed receivables of $85–$90 billion. Its liquidity available for use was $20.8 billion at quarter-end; managed leverage was 8.0:1, with a projected range of 8–9:1.
- Ford consolidated Auto Alliance International (AAI) on September 1 after taking management control. A $155 million pre-tax remeasurement gain contributed to a $136 million special item after a related adjustment. Mazda’s 50% interest is redeemable under a put/call option beginning in 2015; the recorded redeemable noncontrolling interest was $320 million.
- Ford tested Ford Europe long-lived assets for impairment and found no impairment at September 30, based on projections including an 8% long-term operating-margin assumption. Changed business or economic assumptions could prompt further testing and a potential impairment.
- Key risks include continued European and global weakness, market-share and pricing pressure, currency and commodity movements, supplier disruption, pension obligations, product defects and recalls, regulation, litigation, and Ford Credit funding, credit-loss and vehicle-residual-value risks. The company estimated reasonably possible loss above accruals for material matters at up to about $2.3 billion, reflecting non-U.S. indirect tax matters; ultimate outcomes remain uncertain.
- Ford reported $100.6 billion of debt and significant pension obligations. Its liquidity assessment and forward-looking plans depend on assumptions and are subject to the risks described in the filing.
Important facts for investors to verify
- Whether Ford Europe’s dealer-stock actions, restructuring costs and capacity reductions track the stated timetable, and how they affect losses and cash flow.
- Whether North American results can offset pressure in Europe and other regions, including changes in market share, pricing, incentives and product mix.
- Ford Credit’s profit, funding access, managed receivables, leverage, credit losses and lease residual values, including the availability and renewal of committed funding capacity.
- Automotive cash generation after capital spending and pension contributions, as well as the sustainability of the company’s liquidity and dividend.
- Developments in the disclosed tax, litigation, warranty and pension exposures; review the filing’s stated $2.3 billion reasonably possible loss estimate and its limitations.
- The assumptions supporting the Ford Europe asset valuation and the reported AAI gain and redeemable interest. Also note that interim financial information received a limited review, not an audit.