Ford Motor Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise stated. The interim statements were reviewed, not audited.
Business context and financial results
Ford reports Automotive and Financial Services sectors. Results improved substantially from 2009, led by Automotive operating recovery and Ford Credit’s lower credit losses. Comparisons are affected by the 2009 accounting change for variable-interest entities; prior-period figures in this filing were revised to reflect it.
| Metric | Q3 2010 | Q3 2009 | First nine months 2010 | First nine months 2009 |
|---|---|---|---|---|
| Total sales and revenues | $29.9 billion | $30.3 billion | $96.5 billion | $81.5 billion |
| Income before tax | $1.9 billion | $1.1 billion | $6.9 billion | $1.7 billion |
| Net income attributable to Ford | $1.687 billion | $997 million | $6.371 billion | $1.831 billion |
| Diluted EPS | $0.43 | $0.29 | $1.61 | $0.61 |
| Automotive operating income | $1.334 billion | $477 million | $5.181 billion | Loss of $3.757 billion |
| Consolidated operating cash flow | Not separately provided for Q3 | Not separately provided for Q3 | $10.238 billion | $15.081 billion |
Approximate Automotive operating margin was 4.8% in Q3 2010 and 5.8% for the first nine months, calculated as Automotive operating income divided by Automotive sales. Financial Services revenues declined to $2.3 billion in Q3 and $7.5 billion year to date, while pre-tax income rose to $761 million and $2.451 billion, respectively.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $18.0 billion and marketable securities were $26.2 billion. Total company debt was $116.7 billion, down from $131.6 billion at December 31, 2009; much of the debt is associated with Financial Services.
- Automotive gross cash was $23.8 billion versus Automotive debt of $26.4 billion, or net debt of $2.6 billion, improved from $8.7 billion at year-end 2009. Automotive liquidity, including available credit facilities, was $29.4 billion.
- Automotive cash and marketable securities totaled $23.9 billion; Financial Services cash and marketable securities totaled $20.5 billion by sector balance sheet figures. Some Financial Services cash supports securitizations and is not freely available for general purposes.
- Automotive operating-related cash flow, a company-defined non-GAAP measure, was positive $3.4 billion for the first nine months, versus negative $3.7 billion in 2009. Automotive GAAP operating cash flow was $4.625 billion, compared with negative $959 million.
- Ford’s total equity remained negative at $1.740 billion, an improvement from a $7.782 billion deficit at year-end 2009.
Material changes and unusual items
- Automotive Q3 pre-tax income increased by $684 million year over year. Higher volume and mix, pricing and currency effects contributed; higher structural and commodity costs partially offset gains. North America improved strongly, while Europe posted a pre-tax loss.
- Ford Credit’s Q3 pre-tax income rose $89 million. Lower credit-loss provisions, stronger returned-lease vehicle residual performance and lower operating costs were partly offset by lower receivables and the absence of certain prior-year currency and derivative gains. Nine-month charge-offs fell to $314 million from $857 million; the allowance for credit losses was $973 million.
- Ford sold Volvo on August 2, 2010, receiving $1.3 billion cash at closing and recording a $200 million note and a $126 million receivable for estimated purchase-price adjustments. Ford recognized a $23 million pre-tax sale loss and expected final adjustments in Q4 2010 or Q1 2011.
- Reported nine-month 2009 Automotive results included $4.663 billion of net gains on debt-reduction actions, materially affecting the year-over-year comparison. The 2010 nine-month special-item total was a $138 million loss, compared with a $3.268 billion gain in 2009.
- Ford paid scheduled UAW VEBA note amounts and retired Note A in Q2. After quarter-end, on October 29, it prepaid the remaining Note B obligation for $3.5 billion cash. Management said first-nine-month debt actions plus this prepayment were expected to reduce annualized interest expense by about $800 million.
Outlook, management commentary and risks
- Management expected positive Automotive operating-related cash flow and solid operating results for full-year 2010, with each Automotive operation profitable in Q4. It expected Automotive cash to be about equal to Automotive debt by year-end, even without conversion of the senior convertible notes.
- For 2010, Ford forecast U.S. industry volume of about 11.6 million units and European volume of about 15 million; Automotive structural costs about $1 billion higher than 2009; commodity costs about $1 billion higher; and capital spending about $4 billion.
- Ford expected continued improvement in company profitability and Automotive operating-related cash flow in 2011, with each operation profitable. Ford Credit was expected to remain solidly profitable but below 2010 earnings; its 2011 credit-loss allowance reductions and lease-related gains were expected to be smaller.
- Ford Credit expected year-end 2010 managed receivables of $80–$85 billion and approximately $2.5 billion in 2010 distributions. Its liquidity available for use was $24.6 billion at September 30. Management cited capital-market access, securitization capacity, eligible collateral and regulatory changes as funding risks.
- Ford identified risks including weaker industry demand or market share, pricing competition, commodity and currency volatility, supplier or labor disruptions, pension and retiree-benefit obligations, product defects and recalls, regulatory costs, and Ford Credit credit, residual-value and funding risks. Ford specifically warned that rating-agency consent requirements could impede U.S. public securitization access after January 24, 2011.
- The company maintained a valuation allowance against significant deferred tax assets despite 2010 profitability. Management said sustained profitability could lead to a partial or full reversal as early as the second half of 2011, which would raise reported tax expense but not cash taxes. The October 2010 convertible-note exchange offers could also produce substantial Q4 special charges.
- Management said disclosure controls were effective. The independent accountant’s interim review found no material modifications needed, but did not constitute an audit opinion.
Most important facts for investors to verify
- Whether operating cash generation and the expected year-end Automotive cash/debt balance materialized after the $3.5 billion VEBA Note B prepayment.
- Final Volvo sale-price adjustments and the related cash proceeds, receivable settlement and any further accounting effects.
- Acceptance and settlement results of the convertible-note offers, including dilution, cash premiums and reported charges.
- Whether Ford Credit’s credit-loss allowance, lease residual values, receivables and funding access remained consistent with management’s forecasts.
- Progress on the 2010–2011 profitability, cost, capital-spending and market-share outlook, including the impact of the deferred-tax valuation allowance.
- Potential consequences of the January 2011 securitization rating-consent issue and applicable financial-services regulation.