Ford Motor Company — 2011 Q3 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2011, and compares results with the corresponding 2010 periods. Ford reports Automotive and Financial Services (primarily Ford Credit) sectors. Interim results are not necessarily indicative of full-year results; the independent accountant performed a review, not an audit.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $33.0 billion | $29.9 billion | $101.7 billion | $96.5 billion |
| Income before tax | $1.846 billion | $1.887 billion | $7.228 billion | $6.869 billion |
| Net income attributable to Ford | $1.649 billion | $1.687 billion | $6.598 billion | $6.371 billion |
| Diluted earnings per share | $0.41 | $0.43 | $1.62 | $1.61 |
| Automotive pre-tax results | $1.241 billion | $1.126 billion | $5.315 billion | $4.418 billion |
| Financial Services pre-tax results | $605 million | $761 million | $1.913 billion | $2.451 billion |
- Revenue and segment mix: Automotive revenue rose year over year, while Financial Services revenue declined. Automotive results improved, but Ford Credit earnings were lower.
- Cash flow: Consolidated operating cash flow from continuing operations was $10.019 billion for the first nine months, versus $10.238 billion a year earlier. Capital expenditures were $3.135 billion. Cash and cash equivalents increased to $16.460 billion at September 30 from $14.805 billion at year-end 2010.
- Automotive liquidity: Automotive gross cash was $20.8 billion and net cash was $8.1 billion, compared with $20.5 billion and $1.4 billion, respectively, at year-end 2010. Automotive liquidity, including available credit lines, was $31.0 billion.
- Debt and equity: Consolidated debt declined to $95.131 billion from $103.988 billion at year-end. Total equity was $6.026 billion, versus a deficit of $642 million at year-end, principally reflecting 2011 earnings and other equity changes.
- Margins: Ford forecast full-year 2011 Automotive operating margin of about 5.7%, compared with 6.1% in 2010. The filing does not provide a clear Q3 consolidated operating-margin measure.
Material changes versus prior periods
- Q3 Ford-attributable net income declined $38 million year over year; nine-month income increased $227 million. Nine-month diluted EPS edged up to $1.62 from $1.61.
- Automotive pre-tax results improved year over year, supported by pricing, volume and mix, and lower net interest expense. Higher commodity and material costs, including unfavorable commodity-hedge mark-to-market adjustments, offset gains.
- Ford Credit’s lower Q3 and year-to-date pre-tax results reflected fewer lease terminations and related vehicle-sale gains, and lower credit-loss reserve reductions.
- Ford repaid its secured term loans and reduced Automotive debt. Redemption of approximately $3 billion of subordinated convertible debentures reduced annualized interest costs by about $190 million, with a $60 million pre-tax charge in Q1.
Outlook, commentary, and risks
- Management expected 2011 total-company pre-tax operating profit to improve from $8.3 billion in 2010, and Automotive operating-related cash flow to improve from $4.4 billion. It projected 2011 capital spending of about $4.6 billion and said each Automotive operation and Ford Credit was expected to be profitable for the full year.
- Ford expected full-year Automotive commodity costs, including hedging, to increase about $2.2 billion year over year. Q3 included about $350 million of unfavorable commodity-hedge mark-to-market adjustments; management said these non-cash valuation changes could reverse or be offset by later lower commodity costs.
- Management cited Europe’s sovereign-debt and economic conditions as its most significant macroeconomic challenge. Ford Europe reported a Q3 pre-tax loss of $306 million and was nevertheless expected to be profitable for full-year 2011.
- Flood-related supplier disruptions in Thailand were expected to reduce production by about 30,000 units and affect Asia Pacific Africa’s Q4 results.
- The October 2011 UAW agreement covers approximately 41,000 U.S. employees through September 2015. Ford expected about $280 million of Q4 expense for ratification and 2011 operational-performance bonuses; management estimated compensation increases, excluding profit sharing, at less than 1% annually, expected to be offset by more flexible work rules.
- Ford expected to reverse almost all of its deferred-tax valuation allowance in Q4 2011. The release would create an unusually large tax benefit, to be treated as a special item in operating-earnings-per-share reporting; the outcome depends on the year-end assessment.
- The company estimated reasonably possible aggregate losses in excess of accruals for material legal matters of up to about $2.6 billion. It also disclosed pending Brazilian state-tax-incentive proceedings that could require significant cash or collateral if Ford loses.
- Other risks include economic and industry downturns, commodity and currency volatility, supplier disruption, warranty or product claims, pension and postretirement obligations, Ford Credit funding and credit losses, and lower-than-expected used-vehicle residual values.
Most important facts for investors to verify
- Whether Ford achieved its full-year 2011 profit, Automotive-margin, and operating-related cash-flow outlook, including the effects of commodity costs and hedging.
- Whether the anticipated deferred-tax valuation-allowance reversal occurred, its reported size, and the resulting effect on GAAP earnings versus operating measures.
- Ford Credit’s earnings, funding access, managed leverage, credit losses, and lease residual values; management forecast managed receivables of $82–$87 billion at year-end.
- The impact of Europe’s economic conditions and Thailand-related supply disruption on production and regional profitability.
- Developments in significant litigation and Brazilian state-tax matters, including potential cash requirements beyond recorded accruals.
- The costs and operating benefits of the new UAW agreement and the planned Russia joint venture transaction, for which Ford expected to recognize a gain upon deconsolidation.